Why Nations Fail The Origins of Power, Prosperity, and Poverty

“TmJv aucsionic . . . hriJlLajir in its sinipltcitv and power.. 1 ' — -Srcvcn l.cvitl;, coauthor of Frttiitotwinics

THE ORIGINS OF

POWER, PROSPERITY, AND POVERTY

DARON ACEMOGLU JAMES A. ROBINSON

Praise for Why Nations Fail

“Acemoglu and Robinson have made an important contribution to the
debate as to why similar-looking nations differ so greatly in their
economic and political development. Through a broad multiplicity of
historical examples, they show how institutional developments,
sometimes based on very accidental circumstances, have had
enormous consequences. The openness of a society, its willingness to
permit creative destruction, and the rule of law appear to be decisive
for economic development.”

— Kenneth J. Arrow, Nobel laureate in economics, 1972

“The authors convincingly show that countries escape poverty only
when they have appropriate economic institutions, especially private
property and competition. More originally, they argue countries are
more likely to develop the right institutions when they have an open
pluralistic political system with competition for political office, a
widespread electorate, and openness to new political leaders. This
intimate connection between political and economic institutions is the
heart of their major contribution, and has resulted in a study of great
vitality on one of the crucial questions in economics and political
economy.”

— Gary S. Becker, Nobel laureate in economics, 1992

“This important and insightful book, packed with historical examples,
makes the case that inclusive political institutions in support of
inclusive economic institutions is key to sustained prosperity. The
book reviews how some good regimes got launched and then had a
virtuous spiral, while bad regimes remain in a vicious spiral. This is
important analysis not to be missed.”

— Peter Diamond, Nobel laureate in economics, 2010

“For those who think that a nation’s economic fate is determined by
geography or culture, Daron Acemoglu and Jim Robinson have bad
news. It’s manmade institutions, not the lay of the land or the faith of
our forefathers, that determine whether a country is rich or poor.
Synthesizing brilliantly the work of theorists from Adam Smith to
Douglass North with more recent empirical research by economic
historians, Acemoglu and Robinson have produced a compelling and
highly readable book.”

— Niall Ferguson, author of The Ascent of Money

“Acemoglu and Robinson — two of the world’s leading experts on
development — reveal why it is not geography, disease, or culture that
explain why some nations are rich and some poor, but rather a matter
of institutions and politics. This highly accessible book provides
welcome insight to specialists and general readers alike.”

— Francis Fukuyama, author of The End of History and the Last

Man and The Origins of Political Order

“A brilliant and uplifting book — yet also a deeply disturbing wake-up
call. Acemoglu and Robinson lay out a convincing theory of almost
everything to do with economic development. Countries rise when
they put in place the right pro-growth political institutions and they
fail — often spectacularly — when those institutions ossify or fail to
adapt. Powerful people always and everywhere seek to grab complete
control over government, undermining broader social progress for
their own greed. Keep those people in check with effective democracy
or watch your nation fail.”

— Simon Johnson, coauthor of 13 Bankers and professor at MIT

Sloan

“Two of the world’s best and most erudite economists turn to the
hardest issue of all: why are some nations poor and others rich?
Written with a deep knowledge of economics and political history,
this is perhaps the most powerful statement made to date that

‘institutions matter.’ A provocative, instructive, yet thoroughly
enthralling book.”

— Joel Mokyr, Robert H. Strotz Professor of Arts and Sciences
and Professor of Economics and History, Northwestern

University

“In this delightfully readable romp through four hundred years of
history, two of the giants of contemporary social science bring us an
inspiring and important message: it is freedom that makes the world
rich. Let tyrants everywhere tremble!”

— Ian Morris, Stanford University, author of Why the West Rules

—for Now

“Imagine sitting around a table listening to Jared Diamond, Joseph
Schumpeter, and James Madison reflect on more than two thousand
years of political and economic history. Imagine that they weave their
ideas into a coherent theoretical framework based on limiting
extraction, promoting creative destruction, and creating strong
political institutions that share power, and you begin to see the
contribution of this brilliant and engagingly written book.”

— Scott E. Page, University of Michigan and Santa Fe Institute

“In this stunningly wide-ranging book, Acemoglu and Robinson ask a
simple but vital question, why do some nations become rich and
others remain poor? Their answer is also simple — because some
polities develop more inclusive political institutions. What is
remarkable about the book is the crispness and clarity of the writing,
the elegance of the argument, and the remarkable richness of
historical detail. This book is a must-read at a moment when
governments across the Western world must come up with the
political will to deal with a debt crisis of unusual proportions.”

— Steven Pincus, Bradford Durfee Professor of History and
International and Area Studies, Yale University

“It’s the politics, stupid! That is Acemoglu and Robinson’s simple yet
compelling explanation for why so many countries fail to develop.
From the absolutism of the Stuarts to the antebellum South, from
Sierra Leone to Colombia, this magisterial work shows how powerful
elites rig the rules to benefit themselves at the expense of the many.
Charting a careful course between the pessimists and optimists, the
authors demonstrate history and geography need not be destiny. But
they also document how sensible economic ideas and policies often
achieve little in the absence of fundamental political change.”

— Dani Rodrik, Kennedy School of Government, Harvard

University

“This is not only a fascinating and interesting book: it is a really
important one. The highly original research that Professors Acemoglu
and Robinson have done, and continue to do, on how economic
forces, politics, and policy choices evolve together and constrain each
other, and how institutions affect that evolution, is essential to
understanding the successes and failures of societies and nations. And
here, in this book, these insights come in a highly accessible, indeed
riveting form. Those who pick this book up and start reading will
have trouble putting it down.”

— Michael Spence, Nobel laureate in economics, 2001

“This fascinating and readable book centers on the complex joint
evolution of political and economic institutions, in good directions
and bad. It strikes a delicate balance between the logic of political
and economic behavior and the shifts in direction created by
contingent historical events, large and small, at ‘critical junctures.’
Acemoglu and Robinson provide an enormous range of historical
examples to show how such shifts can tilt toward favorable
institutions, progressive innovation, and economic success or toward
repressive institutions and eventual decay or stagnation. Somehow
they can generate both excitement and reflection.”

— Robert Solow, Nobel laureate in economics, 1987

Why

Nations Fail

THE ORIGINS OF POWER,

PROSPERITY, AND POVERTY

Daron Accmoglu and
James A. Robinson

#

Crown Publishers • New York

Copyright © 2012 by Daron Acemoglu and James A. Robinson

All rights reserved.

Published in the United States by Crown Publishers, an imprint of the Crown Publishing
Group, a division of Random House, Inc., New York.

www. crownpublishing, com

CROWN and the CROWN colophon are registered trademarks of Random House, Inc.

Library of Congress Cataloging-in-Publication Data
Acemoglu, Daron.

Why nations fail : the origins of power, prosperity, and poverty / Daron Acemoglu, James A.

Robinson. — 1st ed.
p. cm.

Includes bibliographical references.

1. Economics — Political aspects. 2. Economic history — Political aspects. 3. Poverty —
Developing countries. 4. Economic development — Developing countries.

5. Revolutions — Economic aspects. 6. Developing countries — Economic policy.

7. Developing countries — Social policy. I. Robinson, James A., I960-. II. Title.

HB74.P65A28 2012
330— dc23
2011023538

elSBN: 978-0-307-71923-2

Maps by Melissa Dell
Jacket design by David Tran
Jacket photograph by Kirk Mastin/Getty Images

v3.1

For Arda and Asu— da

Para Maria Angelica , mi vida y mi alma— jr

CONTENTS

Cover
Title Page
Copyright
Dedication

Preface

Why Egyptians filled Tahrir Square to bring down Hosni Mubarak and
what it means for our understanding of the causes of prosperity and

poverty

1 .

So Close and Yet So Different

Nogales, Arizona, and Nogales, Sonora, have the same people, culture,
and geography. Why is one rich and one poor?

2 .

Theories That Don’t Work

Poor countries are poor not because of their geographies or cultures, or
because their leaders do not know which policies will enrich their citizens

3 .

The Making of Prosperity and Poverty

How prosperity and poverty are determined by the incentives created by
institutions, and how politics determines what institutions a nation has

4 .

Small Differences and Critical Junctures: The Weight of History

How institutions change through political conflict and how the past shapes

the present

5 .

“I’ve Seen the Future, and It Works”: Growth Under Extractive Institutions

What Stalin , King Shyaam, the Neolithic Revolution , and the Maya city-
states all had in common and how this explains why China’s current

economic growth cannot last

6 .

Drifting Apart

How institutions evolve over time, often slowly drifting apart

7.

The Turning Point

How apolitical revolution in 1688 changed institutions in England and led

to the Industrial Revolution

8 .

Not on Our Turf: Barriers to Development

Why the politically powerful in many nations opposed the Industrial

Revolution

Photo Inserts

9 .

Reversing Development

How European colonialism impoverished large parts of the world

10 .

The Diffusion of Prosperity

How some parts of the world took different paths to prosperity from that

of Britain

11 .

The Virtuous Circle

How institutions that encourage prosperity create positive feedback loops
that prevent the efforts by elites to undermine them

12 .

The Vicious Circle

How institutions that create poverty generate negative feedback loops and

endure

13 .

Why Nations Fail Today

Institutions, institutions, institutions

14 .

Breaking the Mold

How a few countries changed their economic trajectory by changing their

institutions

15 .

Understanding Prosperity and Poverty

How the world could have been different and how understanding this can
explain why most attempts to combat poverty have failed

Acknowledgments
Bibliographical Essay and Sources

References

PREFACE

This book is about the huge differences in incomes and standards of

living that separate the rich countries of the world, such as the United
States, Great Britain, and Germany, from the poor, such as those in
sub-Saharan Africa, Central America, and South Asia.

As we write this preface, North Africa and the Middle East have
been shaken by the “Arab Spring” started by the so-called Jasmine
Revolution, which was initially ignited by public outrage over the
self-immolation of a street vendor, Mohamed Bouazizi, on December
17, 2010. By January 14, 2011, President Zine El Abidine Ben Ali,
who had ruled Tunisia since 1987, had stepped down, but far from
abating, the revolutionary fervor against the rule of privileged elites
in Tunisia was getting stronger and had already spread to the rest of
the Middle East. Hosni Mubarak, who had ruled Egypt with a tight
grip for almost thirty years, was ousted on February 11, 2011. The
fates of the regimes in Bahrain, Libya, Syria, and Yemen are unknown
as we complete this preface.

The roots of discontent in these countries lie in their poverty. The
average Egyptian has an income level of around 12 percent of the
average citizen of the United States and can expect to live ten fewer
years; 20 percent of the population is in dire poverty. Though these
differences are significant, they are actually quite small compared
with those between the United States and the poorest countries in the
world, such as North Korea, Sierra Leone, and Zimbabwe, where well
over half the population lives in poverty.

Why is Egypt so much poorer than the United States? What are the
constraints that keep Egyptians from becoming more prosperous? Is
the poverty of Egypt immutable, or can it be eradicated? A natural
way to start thinking about this is to look at what the Egyptians
themselves are saying about the problems they face and why they

rose up against the Mubarak regime. Noha Hamed, twenty-four, a
worker at an advertising agency in Cairo, made her views clear as she
demonstrated in Tahrir Square: “We are suffering from corruption,
oppression and bad education. We are living amid a corrupt system
which has to change.” Another in the square, Mosaab El Shami,
twenty, a pharmacy student, concurred: “I hope that by the end of
this year we will have an elected government and that universal
freedoms are applied and that we put an end to the corruption that
has taken over this country.” The protestors in Tahrir Square spoke
with one voice about the corruption of the government, its inability
to deliver public services, and the lack of equality of opportunity in
their country. They particularly complained about repression and the
absence of political rights. As Mohamed ElBaradei, former director of
the International Atomic Energy Agency, wrote on Twitter on January
13, 2011, “Tunisia: repression + absence of social justice + denial of
channels for peaceful change = a ticking bomb.” Egyptians and
Tunisians both saw their economic problems as being fundamentally
caused by their lack of political rights. When the protestors started to
formulate their demands more systematically, the first twelve
immediate demands posted by Wael Khalil, the software engineer and
blogger who emerged as one of the leaders of the Egyptian protest
movement, were all focused on political change. Issues such as raising
the minimum wage appeared only among the transitional demands
that were to be implemented later.

To Egyptians, the things that have held them back include an
ineffective and corrupt state and a society where they cannot use
their talent, ambition, ingenuity, and what education they can get.
But they also recognize that the roots of these problems are political.
All the economic impediments they face stem from the way political
power in Egypt is exercised and monopolized by a narrow elite. This,
they understand, is the first thing that has to change.

Yet, in believing this, the protestors of Tahrir Square have sharply
diverged from the conventional wisdom on this topic. When they
reason about why a country such as Egypt is poor, most academics
and commentators emphasize completely different factors. Some

stress that Egypt’s poverty is determined primarily by its geography,
by the fact that the country is mostly a desert and lacks adequate
rainfall, and that its soils and climate do not allow productive
agriculture. Others instead point to cultural attributes of Egyptians
that are supposedly inimical to economic development and
prosperity. Egyptians, they argue, lack the same sort of work ethic
and cultural traits that have allowed others to prosper, and instead
have accepted Islamic beliefs that are inconsistent with economic
success. A third approach, the one dominant among economists and
policy pundits, is based on the notion that the rulers of Egypt simply
don’t know what is needed to make their country prosperous, and
have followed incorrect policies and strategies in the past. If these
rulers would only get the right advice from the right advisers, the
thinking goes, prosperity would follow. To these academics and
pundits, the fact that Egypt has been ruled by narrow elites feathering
their nests at the expense of society seems irrelevant to understanding
the country’s economic problems.

In this book well argue that the Egyptians in Tahrir Square, not
most academics and commentators, have the right idea. In fact, Egypt
is poor precisely because it has been ruled by a narrow elite that have
organized society for their own benefit at the expense of the vast
mass of people. Political power has been narrowly concentrated, and
has been used to create great wealth for those who possess it, such as
the $70 billion fortune apparently accumulated by ex-president
Mubarak. The losers have been the Egyptian people, as they only too
well understand.

Well show that this interpretation of Egyptian poverty, the people’s
interpretation, turns out to provide a general explanation for why
poor countries are poor. Whether it is North Korea, Sierra Leone, or
Zimbabwe, well show that poor countries are poor for the same
reason that Egypt is poor. Countries such as Great Britain and the
United States became rich because their citizens overthrew the elites
who controlled power and created a society where political rights
were much more broadly distributed, where the government was
accountable and responsive to citizens, and where the great mass of

people could take advantage of economic opportunities. Well show
that to understand why there is such inequality in the world today we
have to delve into the past and study the historical dynamics of
societies. Well see that the reason that Britain is richer than Egypt is
because in 1688, Britain (or England, to be exact) had a revolution
that transformed the politics and thus the economics of the nation.
People fought for and won more political rights, and they used them
to expand their economic opportunities. The result was a
fundamentally different political and economic trajectory,
culminating in the Industrial Revolution.

The Industrial Revolution and the technologies it unleashed didn’t
spread to Egypt, as that country was under the control of the Ottoman
Empire, which treated Egypt in rather the same way as the Mubarak
family later did. Ottoman rule in Egypt was overthrown by Napoleon
Bonaparte in 1798, but the country then fell under the control of
British colonialism, which had as little interest as the Ottomans in
promoting Egypt’s prosperity. Though the Egyptians shook off the
Ottoman and British empires and, in 1952, overthrew their monarchy,
these were not revolutions like that of 1688 in England, and rather
than fundamentally transforming politics in Egypt, they brought to
power another elite as disinterested in achieving prosperity for
ordinary Egyptians as the Ottoman and British had been. In
consequence, the basic structure of society did not change, and Egypt
stayed poor.

In this book we’ll study how these patterns reproduce themselves
over time and why sometimes they are altered, as they were in
England in 1688 and in France with the revolution of 1789. This will
help us to understand if the situation in Egypt has changed today and
whether the revolution that overthrew Mubarak will lead to a new set
of institutions capable of bringing prosperity to ordinary Egyptians.
Egypt has had revolutions in the past that did not change things,
because those who mounted the revolutions simply took over the
reins from those they’d deposed and re-created a similar system. It is
indeed difficult for ordinary citizens to acquire real political power
and change the way their society works. But it is possible, and well

see how this happened in England, France, and the United States, and
also in Japan, Botswana, and Brazil. Fundamentally it is a political
transformation of this sort that is required for a poor society to
become rich. There is evidence that this may be happening in Egypt.
Reda Metwaly, another protestor in Tahrir Square, argued, “Now you
see Muslims and Christians together, now you see old and young
together, all wanting the same thing.” We’ll see that such a broad
movement in society was a key part of what happened in these other
political transformations. If we understand when and why such
transitions occur, we will be in a better position to evaluate when we
expect such movements to fail as they have often done in the past and
when we may hope that they will succeed and improve the lives of
millions.

1 .

SO CLOSE AND YET SO DIFFERENT

The Economics of the Rio Grande

The city of Nogales is cut in half by a fence. If you stand by it and look

north, you’ll see Nogales, Arizona, located in Santa Cruz County. The
income of the average household there is about $30,000 a year. Most
teenagers are in school, and the majority of the adults are high school
graduates. Despite all the arguments people make about how
deficient the U.S. health care system is, the population is relatively
healthy, with high life expectancy by global standards. Many of the
residents are above age sixty-five and have access to Medicare. It’s
just one of the many services the government provides that most take
for granted, such as electricity, telephones, a sewage system, public
health, a road network linking them to other cities in the area and to
the rest of the United States, and, last but not least, law and order.
The people of Nogales, Arizona, can go about their daily activities
without fear for life or safety and not constantly afraid of theft,
expropriation, or other things that might jeopardize their investments
in their businesses and houses. Equally important, the residents of
Nogales, Arizona, take it for granted that, with all its inefficiency and
occasional corruption, the government is their agent. They can vote to
replace their mayor, congressmen, and senators; they vote in the
presidential elections that determine who will lead their country.
Democracy is second nature to them.

Life south of the fence, just a few feet away, is rather different.
While the residents of Nogales, Sonora, live in a relatively prosperous
part of Mexico, the income of the average household there is about
one-third that in Nogales, Arizona. Most adults in Nogales, Sonora, do

not have a high school degree, and many teenagers are not in school.
Mothers have to worry about high rates of infant mortality. Poor
public health conditions mean it’s no surprise that the residents of
Nogales, Sonora, do not live as long as their northern neighbors. They
also don’t have access to many public amenities. Roads are in bad
condition south of the fence. Law and order is in worse condition.
Crime is high, and opening a business is a risky activity. Not only do
you risk robbery, but getting all the permissions and greasing all the
palms just to open is no easy endeavor. Residents of Nogales, Sonora,
live with politicians’ corruption and ineptitude every day.

In contrast to their northern neighbors, democracy is a very recent
experience for them. Until the political reforms of 2000, Nogales,
Sonora, just like the rest of Mexico, was under the corrupt control of
the Institutional Revolutionary Party, or Partido Revolucionario
Institucional (PRI).

How could the two halves of what is essentially the same city be so
different? There is no difference in geography, climate, or the types of
diseases prevalent in the area, since germs do not face any restrictions
crossing back and forth between the United States and Mexico. Of
course, health conditions are very different, but this has nothing to do
with the disease environment; it is because the people south of the
border live with inferior sanitary conditions and lack decent health
care.

But perhaps the residents are very different. Could it be that the
residents of Nogales, Arizona, are grandchildren of migrants from
Europe, while those in the south are descendants of Aztecs? Not so.
The backgrounds of people on both sides of the border are quite
similar. After Mexico became independent from Spain in 1821, the
area around “Los dos Nogales” was part of the Mexican state of Vieja
California and remained so even after the Mexican-American War of
1846-1848. Indeed, it was only after the Gadsden Purchase of 1853
that the U.S. border was extended into this area. It was Lieutenant N.
Michler who, while surveying the border, noted the presence of the
“pretty little valley of Los Nogales.” Here, on either side of the
border, the two cities rose up. The inhabitants of Nogales, Arizona,

and Nogales, Sonora, share ancestors, enjoy the same food and the
same music, and, we would hazard to say, have the same “culture.”

Of course, there is a very simple and obvious explanation for the
differences between the two halves of Nogales that you’ve probably
long since guessed: the very border that defines the two halves.
Nogales, Arizona, is in the United States. Its inhabitants have access
to the economic institutions of the United States, which enable them
to choose their occupations freely, acquire schooling and skills, and
encourage their employers to invest in the best technology, which
leads to higher wages for them. They also have access to political
institutions that allow them to take part in the democratic process, to
elect their representatives, and replace them if they misbehave. In
consequence, politicians provide the basic services (ranging from
public health to roads to law and order) that the citizens demand.
Those of Nogales, Sonora, are not so lucky. They live in a different
world shaped by different institutions. These different institutions
create very disparate incentives for the inhabitants of the two
Nogaleses and for the entrepreneurs and businesses willing to invest
there. These incentives created by the different institutions of the
Nogaleses and the countries in which they are situated are the main
reason for the differences in economic prosperity on the two sides of
the border.

Why are the institutions of the United States so much more
conducive to economic success than those of Mexico or, for that
matter, the rest of Latin America? The answer to this question lies in
the way the different societies formed during the early colonial
period. An institutional divergence took place then, with implications
lasting into the present day. To understand this divergence we must
begin right at the foundation of the colonies in North and Latin
America.

The Founding of Buenos Aires

Early in 1516 the Spanish navigator Juan Diaz de Solis sailed into a
wide estuary on the Eastern Seaboard of South America. Wading

ashore, de Solis claimed the land for Spain, naming the river the Rio
de la Plata, “River of Silver,” since the local people possessed silver.
The indigenous peoples on either side of the estuary — the Charruas in
what is now Uruguay, and the Querandi on the plains that were to be
known as the Pampas in modern Argentina — regarded the newcomers
with hostility. These locals were hunter-gatherers who lived in small
groups without strong centralized political authorities. Indeed it was
such a band of Charruas who clubbed de Solis to death as he explored
the new domains he had attemped to occupy for Spain.

In 1534 the Spanish, still optimistic, sent out a first mission of
settlers from Spain under the leadership of Pedro de Mendoza. They
founded a town on the site of Buenos Aires in the same year. It should
have been an ideal place for Europeans. Buenos Aires, literally
meaning “good airs,” had a hospitable, temperate climate. Yet the
first stay of the Spaniards there was short lived. They were not after
good airs, but resources to extract and labor to coerce. The Charruas
and the Querandi were not obliging, however. They refused to
provide food to the Spaniards, and refused to work when caught.
They attacked the new settlement with their bows and arrows. The
Spaniards grew hungry, since they had not anticipated having to
provide food for themselves. Buenos Aires was not what they had
dreamed of. The local people could not be forced into providing
labor. The area had no silver or gold to exploit, and the silver that de
Solis found had actually come all the way from the Inca state in the
Andes, far to the west.

The Spaniards, while trying to survive, started sending out
expeditions to find a new place that would offer greater riches and
populations easier to coerce. In 1537 one of these expeditions, under
the leadership of Juan de Ayolas, penetrated up the Parana River,
searching for a route to the Incas. On its way, it made contact with
the Guarani, a sedentary people with an agricultural economy based
on maize and cassava. De Ayolas immediately realized that the
Guarani were a completely different proposition from the Charruas
and the Querandi. After a brief conflict, the Spanish overcame
Guarani resistance and founded a town, Nuestra Senora de Santa

Maria de la Asuncion, which remains the capital of Paraguay today.
The conquistadors married the Guarani princesses and quickly set
themselves up as a new aristocracy. They adapted the existing
systems of forced labor and tribute of the Guarani, with themselves at
the helm. This was the kind of colony they wanted to set up, and
within four years Buenos Aires was abandoned as all the Spaniards
who’d settled there moved to the new town.

Buenos Aires, the “Paris of South America,” a city of wide
European-style boulevards based on the great agricultural wealth of
the Pampas, was not resettled until 1580. The abandonment of
Buenos Aires and the conquest of the Guarani reveals the logic of
European colonization of the Americas. Early Spanish and, as we will
see, English colonists were not interested in tilling the soil
themselves; they wanted others to do it for them, and they wanted
riches, gold and silver, to plunder.

From Cajamarca ...

The expeditions of de Solis, de Mendoza, and de Ayolas came in the
wake of more famous ones that followed Christopher Columbus’s
sighting of one of the islands of the Bahamas on October 12, 1492.
Spanish expansion and colonization of the Americas began in earnest
with the invasion of Mexico by Hernan Cortes in 1519, the expedition
of Francisco Pizarro to Peru a decade and a half later, and the
expedition of Pedro de Mendoza to the Rio de la Plata just two years
after that. Over the next century, Spain conquered and colonized most
of central, western, and southern South America, while Portugal
claimed Brazil to the east.

The Spanish strategy of colonization was highly effective. First
perfected by Cortes in Mexico, it was based on the observation that
the best way for the Spanish to subdue opposition was to capture the
indigenous leader. This strategy enabled the Spanish to claim the
accumulated wealth of the leader and coerce the indigenous peoples
to give tribute and food. The next step was setting themselves up as
the new elite of the indigenous society and taking control of the

existing methods of taxation, tribute, and, particularly, forced labor.

When Cortes and his men arrived at the great Aztec capital of
Tenochtitlan on November 8, 1519, they were welcomed by
Moctezuma, the Aztec emperor, who had decided, in the face of much
advice from his counselors, to welcome the Spaniards peacefully.
What happened next is well described by the account compiled after
1545 by the Franciscan priest Bernardino de Sahagun in his famous
Florentine Codices.

[At] once they [the Spanish] firmly seized
Moctezuma ... then each of the guns shot off ... Fear
prevailed. It was as if everyone had swallowed his heart.

Even before it had grown dark, there was terror, there was
astonishment, there was apprehension, there was a
stunning of the people.

And when it dawned thereupon were proclaimed all the
things which [the Spaniards] required: white tortillas,
roasted turkey hens, eggs, fresh water, wood, firewood,
charcoal . . . This had Moctezuma indeed commanded.

And when the Spaniards were well settled, they
thereupon inquired of Moctezuma as to all the city’s
treasure ... with great zeal they sought gold. And
Moctezuma thereupon went leading the Spaniards. They
went surrounding him . . . each holding him, each grasping
him.

And when they reached the storehouse, a place called
Teocalco, thereupon they brought forth all the brilliant
things; the quetzal feather head fan, the devices, the
shields, the golden discs ... the golden nose crescents, the
golden leg bands, the golden arm bands, the golden
forehead bands.

Thereupon was detached the gold ... at once they
ignited, set fire to ... all the precious things. They all
burned. And the gold the Spaniards formed into separate
bars ... And the Spanish walked everywhere ... They took

all, all that they saw which they saw to be good.

Thereupon they went to Moctezuma’s own storehouse
... at the place called Totocalco ... they brought forth
[Moctezuma’s] own property ... precious things all; the
necklaces with pendants, the arm bands with tufts of
quetzal feathers, the golden arm bands, the bracelets, the
golden bands with shells . . . and the turquoise diadem, the
attribute of the ruler. They took it all.

The military conquest of the Aztecs was completed by 1521. Cortes,
as governor of the province of New Spain, then began dividing up the
most valuable resource, the indigenous population, through the
institution of the encomienda. The encomienda had first appeared in
fifteenth-century Spain as part of the reconquest of the south of the
country from the Moors, Arabs who had settled during and after the
eighth century. In the New World, it took on a much more pernicious
form: it was a grant of indigenous peoples to a Spaniard, known as
the encomendero. The indigenous peoples had to give the encomendero
tribute and labor services, in exchange for which the encomendero was
charged with converting them to Christianity.

A vivid early account of the workings of the encomienda has come
down to us from Bartolome de las Casas, a Dominican priest who
formulated the earliest and one of the most devastating critiques of
the Spanish colonial system. De las Casas arrived on the Spanish
island of Hispaniola in 1502 with a fleet of ships led by the new
governor, Nicolas de Ovando. He became increasingly disillusioned
and disturbed by the cruel and exploitative treatment of the
indigenous peoples he witnessed every day. In 1513 he took part as a
chaplain in the Spanish conquest of Cuba, even being granted an
encomienda for his service. However, he renounced the grant and
began a long campaign to reform Spanish colonial institutions. His
efforts culminated in his book A Short Account of the Destruction of the
Indies, written in 1542, a withering attack on the barbarity of Spanish
rule. On the encomienda he has this to say in the case of Nicaragua:

Each of the settlers took up residence in the town allotted
to him (or encommended to him, as the legal phrase has
it), put the inhabitants to work for him, stole their already
scarce foodstuffs for himself and took over the lands
owned and worked by the natives and on which they
traditionally grew their own produce. The settler would
treat the whole of the native population — dignitaries, old
men, women and children — as members of his household
and, as such, make them labor night and day in his own
interests, without any rest whatsoever.

For the conquest of New Granada, modern Colombia, de las Casas
reports the whole Spanish strategy in action:

To realize their long-term purpose of seizing all the
available gold, the Spaniards employed their usual
strategy of apportioning among themselves (or en-
commending, as they have it) the towns and their
inhabitants . . . and then, as ever, treating them as common
slaves. The man in overall command of the expedition
seized the King of the whole territory for himself and held
him prisoner for six or seven months, quite illicitly
demanding more and more gold and emeralds from him.

This King, one Bogota, was so terrified that, in his anxiety
to free himself from the clutches of his tormentors, he
consented to the demand that he fill an entire house with
gold and hand it over; to this end he sent his people off in
search of gold, and bit by bit they brought it along with
many precious stones. But still the house was not filled
and the Spaniards eventually declared that they would put
him to death for breaking his promise. The commander
suggested they should bring the case before him, as a
representative of the law, and when they did so, entering
formal accusations against the King, he sentenced him to
torture should he persist in not honoring the bargain. They

tortured him with the strappado, put burning tallow on his
belly, pinned both his legs to poles with iron hoops and
his neck with another and then, with two men holding his
hands, proceeded to burn the soles of his feet. From time
to time, the commander would look in and repeat that
they would torture him to death slowly unless he
produced more gold, and this is what they did, the King
eventually succumbing to the agonies they inflicted on
him.

The strategy and institutions of conquest perfected in Mexico were
eagerly adopted elsewhere in the Spanish Empire. Nowhere was this
done more effectively than in Pizarro’s conquest of Peru. As de las
Casas begins his account:

In 1531 another great villain journeyed with a number of
men to the kingdom of Peru. He set out with every
intention of imitating the strategy and tactics of his fellow
adventurers in other parts of the New World.

Pizarro began on the coast near the Peruvian town of Tumbes and
marched south. On November 15, 1532, he reached the mountain
town of Cajamarca, where the Inca emperor Atahualpa was encamped
with his army. The next day, Atahualpa, who had just vanquished his
brother Huascar in a contest over who would succeed their deceased
father, Huayna Capac, came with his retinue to where the Spanish
were camped. Atahualpa was irritated because news of atrocities that
the Spanish had already committed, such as violating a temple of the
Sun God Inti, had reached him. What transpired next is well known.
The Spanish laid a trap and sprang it. They killed Atahualpa’s guards
and retainers, possibly as many as two thousand people, and captured
the king. To gain his freedom, Atahualpa had to promise to fill one
room with gold and two more of the same size with silver. He did
this, but the Spanish, reneging on their promises, strangled him in
July 1533. That November, the Spanish captured the Inca capital of
Cusco, where the Incan aristocracy received the same treatment as

Atahualpa, being imprisoned until they produced gold and silver.
When they did not satisfy Spanish demands, they were burned alive.
The great artistic treasures of Cusco, such as the Temple of the Sun,
had their gold stripped from them and melted down into ingots.

At this point the Spanish focused on the people of the Inca Empire.
As in Mexico, citizens were divided into encomiendas, with one going
to each of the conquistadors who had accompanied Pizarro. The
encomienda was the main institution used for the control and
organization of labor in the early colonial period, but it soon faced a
vigorous contender. In 1545 a local named Diego Gualpa was
searching for an indigenous shrine high in the Andes in what is today
Bolivia. He was thrown to the ground by a sudden gust of wind and in
front of him appeared a cache of silver ore. This was part of a vast
mountain of silver, which the Spanish baptized El Cerro Rico, “The
Rich Hill.” Around it grew the city of Potosi, which at its height in
1650 had a population of 160,000 people, larger than Lisbon or
Venice in this period.

To exploit the silver, the Spanish needed miners — a lot of miners.
They sent a new viceroy, the chief Spanish colonial official, Francisco
de Toledo, whose main mission was to solve the labor problem. De
Toledo, arriving in Peru in 1569, first spent five years traveling
around and investigating his new charge. He also commissioned a
massive survey of the entire adult population. To find the labor he
needed, de Toledo first moved almost the entire indigenous
population, concentrating them in new towns called reducciones —
literally “reductions” — which would facilitate the exploitation of
labor by the Spanish Crown. Then he revived and adapted an Inca
labor institution known as the mita, which, in the Incas’ language,
Quechua, means “a turn.” Under their mita system, the Incas had used
forced labor to run plantations designed to provide food for temples,
the aristocracy, and the army. In return, the Inca elite provided
famine relief and security. In de Toledo’s hands the mita, especially
the Potosi mita, was to become the largest and most onerous scheme
of labor exploitation in the Spanish colonial period. De Toledo
defined a huge catchment area, running from the middle of modern-

day Peru and encompassing most of modern Bolivia. It covered about
two hundred thousand square miles. In this area, one-seventh of the
male inhabitants, newly arrived in their reducciones, were required to
work in the mines at Potosi. The Potosi mita endured throughout the
entire colonial period and was abolished only in 1825. Map 1 shows
the catchment area of the mita superimposed on the extent of the Inca
empire at the time of the Spanish conquest. It illustrates the extent to
which the mita overlapped with the heartland of the empire,
encompassing the capital Cusco.

Venezuela

Brazil

' Potosi

Paraguay

Asunckm

Argentina

> Colombia

jEcuador

Peru

k .Cajanwca

Uruguay ^
rBuenos Aires

Modern boundaries
Inca Empire
Mitu boundary
Inca road network
Colonial cities

Map 1: The Inca Empire, the Inca road network, and the
mining mitu catchment area

Remarkably, you still see the legacy of the mita in Peru today. Take
the differences between the provinces of Calca and nearby Acomayo.
There appears to be few differences among these provinces. Both are

high in the mountains, and each is inhabited by the Quechua-
speaking descendants of the Incas. Yet Acomayo is much poorer, with
its inhabitants consuming about one-third less than those in Calca.
The people know this. In Acomayo they ask intrepid foreigners,
“Don’t you know that the people here are poorer than the people over
there in Calca? Why would you ever want to come here?” Intrepid
because it is much harder to get to Acomayo from the regional capital
of Cusco, ancient center of the Inca Empire, than it is to get to Calca.
The road to Calca is surfaced, the one to Acomayo is in a terrible state
of disrepair. To get beyond Acomayo, you need a horse or a mule. In
Calca and Acomayo, people grow the same crops, but in Calca they
sell them on the market for money. In Acomayo they grow food for
their own subsistence. These inequalities, apparent to the eye and to
the people who live there, can be understood in terms of the
institutional differences between these departments — institutional
differences with historical roots going back to de Toledo and his plan
for effective exploitation of indigenous labor. The major historical
difference between Acomayo and Calca is that Acomayo was in the
catchment area of the Potosi mita. Calca was not.

In addition to the concentration of labor and the mita, de Toledo
consolidated the encomienda into a head tax, a fixed sum payable by
each adult male every year in silver. This was another scheme
designed to force people into the labor market and reduce wages for
Spanish landowners. Another institution, the repartimiento de
mercancias, also became widespread during de Toledo’s tenure.
Derived from the Spanish verb repartir, to distribute, this
repartimiento, literally “the distribution of goods,” involved the forced
sale of goods to locals at prices determined by Spaniards. Finally, de
Toledo introduced the trajin — meaning, literally, “the burden” —
which used the indigenous people to carry heavy loads of goods, such
as wine or coca leaves or textiles, as a substitute for pack animals, for
the business ventures of the Spanish elite.

Throughout the Spanish colonial world in the Americas, similar
institutions and social structures emerged. After an initial phase of
looting, and gold and silver lust, the Spanish created a web of

institutions designed to exploit the indigenous peoples. The full
gamut of encomienda, mita, repartimiento, and trajin was designed to
force indigenous people’s living standards down to a subsistence level
and thus extract all income in excess of this for Spaniards. This was
achieved by expropriating their land, forcing them to work, offering
low wages for labor services, imposing high taxes, and charging high
prices for goods that were not even voluntarily bought. Though these
institutions generated a lot of wealth for the Spanish Crown and made
the conquistadors and their descendants very rich, they also turned
Latin America into the most unequal continent in the world and
sapped much of its economic potential.

... to Jamestown

As the Spanish began their conquest of the Americas in the 1490s,
England was a minor European power recovering from the
devastating effects of a civil war, the Wars of the Roses. She was in no
state to take advantage of the scramble for loot and gold and the
opportunity to exploit the indigenous peoples of the Americas. Nearly
one hundred years later, in 1588, the lucky rout of the Spanish
Armada, an attempt by King Philip II of Spain to invade England, sent
political shockwaves around Europe. Fortunate though England’s
victory was, it was also a sign of growing English assertiveness on the
seas that would enable them to finally take part in the quest for
colonial empire.

It is thus no coincidence that the English began their colonization
of North America at exactly the same time. But they were already
latecomers. They chose North America not because it was attractive,
but because it was all that was available. The “desirable” parts of the
Americas, where the indigenous population to exploit was plentiful
and where the gold and silver mines were located, had already been
occupied. The English got the leftovers. When the eighteenth-century
English writer and agriculturalist Arthur Young discussed where
profitable “staple products,” by which he meant exportable
agricultural goods, were produced, he noted:

It appears upon the whole, that the staple productions of
our colonies decrease in value in proportion to their
distance from the sun. In the West Indies, which are the
hottest of all, they make to the amount of 81. 12s. Id. per
head. In the southern continental ones, to the amount of
51. 10s. In the central ones, to the amount of 9s. 6 l/2d. In
the northern settlements, to that of 2s. 6d. This scale
surely suggests a most important lesson — to avoid
colonizing in northern latitudes.

The first English attempt to plant a colony, at Roanoke, in North
Carolina, between 1585 and 1587, was a complete failure. In 1607
they tried again. Shortly before the end of 1606, three vessels, Susan
Constant, Godspeed, and Discovery, under the command of Captain
Christopher Newport, set off for Virginia. The colonists, under the
auspices of the Virginia Company, sailed into Chesapeake Bay and up
a river they named the James, after the ruling English monarch,
James I. On May 14, 1607, they founded the settlement of
Jamestown.

Though the settlers on board the ships owned by the Virginia
Company were English, they had a model of colonization heavily
influenced by the template set up by Cortes, Pizarro, and de Toledo.
Their first plan was to capture the local chief and use him as a way to
get provisions and to coerce the population into producing food and
wealth for them.

When they first landed in Jamestown, the English colonists did not
know that they were within the territory claimed by the Powhatan
Confederacy, a coalition of some thirty polities owing allegiance to a
king called Wahunsunacock. Wahunsunacock’s capital was at the
town of Werowocomoco, a mere twenty miles from Jamestown. The
plan of the colonists was to learn more about the lay of the land. If
the locals could not be induced to provide food and labor, the
colonists might at least be able to trade with them. The notion that
the settlers themselves would work and grow their own food seems
not to have crossed their minds. That is not what conquerors of the

New World did.

Wahunsunacock quickly became aware of the colonists’ presence
and viewed their intentions with great suspicion. He was in charge of
what for North America was quite a large empire. But he had many
enemies and lacked the overwhelming centralized political control of
the Incas. Wahunsunacock decided to see what the intentions of the
English were, initially sending messengers saying that he desired
friendly relations with them.

As the winter of 1607 closed in, the settlers in Jamestown began to
run low on food, and the appointed leader of the colony’s ruling
council, Edward Marie Wingfield, dithered indecisively. The situation
was rescued by Captain John Smith. Smith, whose writings provide
one of our main sources of information about the early development
of the colony, was a larger-than-life character. Born in England, in
rural Lincolnshire, he disregarded his father’s desires for him to go
into business and instead became a soldier of fortune. He first fought
with English armies in the Netherlands, after which he joined
Austrian forces serving in Hungary fighting against the armies of the
Ottoman Empire. Captured in Romania, he was sold as a slave and
put to work as a field hand. He managed one day to overcome his
master and, stealing his clothes and his horse, escape back into
Austrian territory. Smith had got himself into trouble on the voyage
to Virginia and was imprisoned on the Susan Constant for mutiny after
defying the orders of Wingfield. When the ships reached the New
World, the plan was to put him on trial. To the immense horror of
Wingfield, Newport, and other elite colonists, however, when they
opened their sealed orders, they discovered that the Virginia
Company had nominated Smith to be a member of the ruling council
that was to govern Jamestown.

With Newport sailing back to England for supplies and more
colonists, and Wingfield uncertain about what to do, it was Smith
who saved the colony. He initiated a series of trading missions that
secured vital food supplies. On one of these he was captured by
Opechancanough, one of Wahunsunacock’s younger brothers, and was
brought before the king at Werowocomoco. He was the first

Englishman to meet Wahunsunacock, and it was at this initial
meeting that according to some accounts Smith’s life was saved only
at the intervention of Wahunsunacock’s young daughter Pocahontas.
Freed on January 2, 1608, Smith returned to Jamestown, which was
still perilously low on food, until the timely return of Newport from
England later on the same day.

The colonists of Jamestown learned little from this initial
experience. As 1608 proceeded, they continued their quest for gold
and precious metals. They still did not seem to understand that to
survive, they could not rely on the locals to feed them through either
coercion or trade. It was Smith who was the first to realize that the
model of colonization that had worked so well for Cortes and Pizarro
simply would not work in North America. The underlying
circumstances were just too different. Smith noted that, unlike the
Aztecs and Incas, the peoples of Virginia did not have gold. Indeed,
he noted in his diary, “Victuals you must know is all their wealth.”
Anas Todkill, one of the early settlers who left an extensive diary,
expressed well the frustrations of Smith and the few others on which
this recognition dawned:

“There was no talke, no hope, no worke, but dig gold,

refine gold, load gold.”

When Newport sailed for England in April 1608 he took a cargo of
pyrite, fool’s gold. He returned at the end of September with orders
from the Virginia Company to take firmer control over the locals.
Their plan was to crown Wahunsunacock, hoping this would render
him subservient to the English king James I. They invited him to
Jamestown, but Wahunsunacock, still deeply suspicious of the
colonists, had no intention of risking capture. John Smith recorded
Wahunsunacock’s reply: “If your King have sent me presents, I also
am a King, and this is my land ... Your father is to come to me, not I
to him, nor yet to your fort, neither will I bite at such a bait.”

If Wahunsunacock would not “bite at such a bait,” Newport and
Smith would have to go to Werowocomoco to undertake the

coronation. The whole event appears to have been a complete fiasco,
with the only thing coming out of it a resolve on the part of
Wahunsunacock that it was time to get rid of the colony. He imposed
a trade embargo. Jamestown could no longer trade for supplies.
Wahunsunacock would starve them out.

Newport set sail once more for England, in December 1608. He
took with him a letter written by Smith pleading with the directors of
the Virginia Company to change the way they thought about the
colony. There was no possibility of a get-rich-quick exploitation of
Virginia along the lines of Mexico and Peru. There were no gold or
precious metals, and the indigenous people could not be forced to
work or provide food. Smith realized that if there were going to be a
viable colony, it was the colonists who would have to work. He
therefore pleaded with the directors to send the right sort of people:
“When you send againe I entreat you rather to send some thirty
carpenters, husbandmen, gardeners, fishermen, blacksmiths, masons,
and diggers up of trees, roots, well provided, then a thousand of such
as we have.”

Smith did not want any more useless goldsmiths. Once more
Jamestown survived only because of his resourcefulness. He managed
to cajole and bully local indigenous groups to trade with him, and
when they wouldn’t, he took what he could. Back in the settlement,
Smith was completely in charge and imposed the rule that “he that
will not worke shall not eat.” Jamestown survived a second winter.

The Virginia Company was intended to be a moneymaking
enterprise, and after two disastrous years, there was no whiff of
profit. The directors of the company decided that they needed a new
model of governance, replacing the ruling council with a single
governor. The first man appointed to this position was Sir Thomas
Gates. Heeding some aspects of Smith’s warning, the company
realized that they had to try something new. This realization was
driven home by the events of the winter of 1609/1610 — the so-called
“starving time.” The new mode of governance left no room for Smith,
who, disgruntled, returned to England in the autumn of 1609.
Without his resourcefulness, and with Wahunsunacock throttling the

food supply, the colonists in Jamestown perished. Of the five hundred
who entered the winter, only sixty were alive by March. The situation
was so desperate that they resorted to cannibalism.

The “something new” that was imposed on the colony by Gates and
his deputy, Sir Thomas Dale, was a work regime of draconian severity
for English settlers — though not of course for the elite running the
colony. It was Dale who propagated the “Lawes Divine, Morall and
Martiall.” This included the clauses

No man or woman shall run away from the colony to the
Indians, upon pain of death.

Anyone who robs a garden, public or private, or a vineyard, or
who steals ears of corn shall be punished with death.

No member of the colony will sell or give any commodity of
this country to a captain, mariner, master or sailor to
transport out of the colony, for his own private uses, upon
pain of death.

Canada

United States

Mexicg

**®enezuela

CartSmbia

i\ 1a

Paraguay

Uruguay

■"gentilw

Population density
(people/ square kilometer)

No data
H 0-0.75
■■ 0.75-2.5
■1 2.5-10
10-400

Map 2: Population density in 1500 in the Americas

If the indigenous peoples could not be exploited, reasoned the
Virginia Company, perhaps the colonists could. The new model of
colonial development entailed the Virginia Company owning all the
land. Men were housed in barracks, and given company-determined
rations. Work gangs were chosen, each one overseen by an agent of
the company. It was close to martial law, with execution as the
punishment of first resort. As part of the new institutions for the
colony, the first clause just given is significant. The company
threatened with death those who ran away. Given the new work

regime, running away to live with the locals became more and more
of an attractive option for the colonists who had to do the work. Also
available, given the low density of even indigenous populations in
Virginia at that time, was the prospect of going it alone on the
frontier beyond the control of the Virginia Company. The power of
the company in the face of these options was limited. It could not
coerce the English settlers into hard work at subsistence rations.

Map 2 shows an estimate of the population density of different
regions of the Americas at the time on the Spanish conquest. The
population density of the United States, outside of a few pockets, was
at most three-quarters of a person per square mile. In central Mexico
or Andean Peru, the population density was as high as four hundred
people per square mile, more than five hundred times higher. What
was possible in Mexico or Peru was not feasible in Virginia.

It took the Virginia Company some time to recognize that its initial
model of colonization did not work in Virginia, and it took a while,
too, for the failure of the “Lawes Divine, Morall and Martiall” to sink
in. Starting in 1618, a dramatically new strategy was adopted. Since
it was possible to coerce neither the locals nor the settlers, the only
alternative was to give the settlers incentives. In 1618 the company
began the “headright system,” which gave each male settler fifty acres
of land and fifty more acres for each member of his family and for all
servants that a family could bring to Virginia. Settlers were given
their houses and freed from their contracts, and in 1619 a General
Assembly was introduced that effectively gave all adult men a say in
the laws and institutions governing the colony. It was the start of
democracy in the United States.

It took the Virginia Company twelve years to learn its first lesson
that what had worked for the Spanish in Mexico and in Central and
South America would not work in the north. The rest of the
seventeenth century saw a long series of struggles over the second
lesson: that the only option for an economically viable colony was to
create institutions that gave the colonists incentives to invest and to
work hard.

As North America developed, English elites tried time and time

again to set up institutions that would heavily restrict the economic
and political rights for all but a privileged few of the inhabitants of
the colony, just as the Spanish did. Yet in each case this model broke
down, as it had in Virginia.

One of the most ambitious attempts began soon after the change in
strategy of the Virginia Company. In 1632 ten million acres of land
on the upper Chesapeake Bay were granted by the English king
Charles I to Cecilius Calvert, Lord Baltimore. The Charter of Maryland
gave Lord Baltimore complete freedom to create a government along
any lines he wished, with clause VII noting that Baltimore had “for
the good and happy Government of the said Province, free, full, and
absolute Power, by the Tenor of these Presents, to Ordain, Make, and
Enact Laws, of what Kind soever.”

Baltimore drew up a detailed plan for creating a manorial society, a
North American variant of an idealized version of seventeenth-
century rural England. It entailed dividing the land into plots of
thousands of acres, which would be run by lords. The lords would
recruit tenants, who would work the lands and pay rents to the
privileged elite controlling the land. Another similar attempt was
made later in 1663, with the founding of Carolina by eight
proprietors, including Sir Anthony Ashley-Cooper. Ashley-Cooper,
along with his secretary, the great English philosopher John Locke,
formulated the Fundamental Constitutions of Carolina. This
document, like the Charter of Maryland before it, provided a
blueprint for an elitist, hierarchical society based on control by a
landed elite. The preamble noted that “the government of this
province may be made most agreeable to the monarchy under which
we live and of which this province is a part; and that we may avoid
erecting a numerous democracy.”

The clauses of the Fundamental Constitutions laid out a rigid social
structure. At the bottom were the “leet-men,” with clause 23 noting,
“All the children of leet-men shall be leet-men, and so to all
generations.” Above the leet-men, who had no political power, were
the landgraves and caziques, who were to form the aristocracy.
Landgraves were to be allocated forty-eight thousand acres of land

each, and caziques twenty-four thousand acres. There was to be a
parliament, in which landgraves and caziques were represented, but it
would be permitted to debate only those measures that had
previously been approved by the eight proprietors.

Just as the attempt to impose draconian rule in Virginia failed, so
did the plans for the same type of institutions in Maryland and
Carolina. The reasons were similar. In all cases it proved to be
impossible to force settlers into a rigid hierarchical society, because
there were simply too many options open to them in the New World.
Instead, they had to be provided with incentives for them to want to
work. And soon they were demanding more economic freedom and
further political rights. In Maryland, too, settlers insisted on getting
their own land, and they forced Lord Baltimore into creating an
assembly. In 1691 the assembly induced the king to declare Maryland
a Crown colony, thus removing the political privileges of Baltimore
and his great lords. A similar protracted struggle took place in the
Carolinas, again with the proprietors losing. South Carolina became a
royal colony in 1729.

By the 1720s, all the thirteen colonies of what was to become the
United States had similar structures of government. In all cases there
was a governor, and an assembly based on a franchise of male
property holders. They were not democracies; women, slaves, and the
propertyless could not vote. But political rights were very broad
compared with contemporary societies elsewhere. It was these
assemblies and their leaders that coalesced to form the First
Continental Congress in 1774, the prelude to the independence of the
United States. The assemblies believed they had the right to
determine both their own membership and the right to taxation. This,
as we know, created problems for the English colonial government.

A Tale of Two Constitutions

It should now be apparent that it is not a coincidence that the United
States, and not Mexico, adopted and enforced a constitution that
espoused democratic principles, created limitations on the use of

political power, and distributed that power broadly in society. The
document that the delegates sat down to write in Philadelphia in May
1787 was the outcome of a long process initiated by the formation of
the General Assembly in Jamestown in 1619.

The contrast between the constitutional process that took place at
the time of the independence of the United States and the one that
took place a little afterward in Mexico is stark. In February 1808,
Napoleon Bonaparte’s French armies invaded Spain. By May they had
taken Madrid, the Spanish capital. By September the Spanish king
Ferdinand had been captured and had abdicated. A national junta, the
Junta Central, took his place, taking the torch in the fight against the
French. The Junta met first at Aranjuez, but retreated south in the
face of the French armies. Finally it reached the port of Cadiz, which,
though besieged by Napoleonic forces, held out. Here the Junta
formed a parliament, called the Cortes. In 1812 the Cortes produced
what became known as the Cadiz Constitution, which called for the
introduction of a constitutional monarchy based on notions of
popular sovereignty. It also called for the end of special privileges and
the introduction of equality before the law. These demands were all
anathema to the elites of South America, who were still ruling an
institutional environment shaped by the encomienda, forced labor, and
absolute power vested in them and the colonial state.

The collapse of the Spanish state with the Napoleonic invasion
created a constitutional crisis throughout colonial Latin America.
There was much dispute about whether to recognize the authority of
the Junta Central, and in response, many Latin Americans began to
form their own juntas. It was only a matter of time before they began
to sense the possibility of becoming truly independent from Spain.
The first declaration of independence took place in La Paz, Bolivia, in
1809, though it was quickly crushed by Spanish troops sent from
Peru. In Mexico the political attitudes of the elite had been shaped by
the 1810 Hidalgo Revolt, led by a priest, Father Miguel Hidalgo.
When Hidalgo’s army sacked Guanajuato on September 23, they
killed the intendant, the senior colonial official, and then started
indiscriminately to kill white people. It was more like class or even

ethnic warfare than an independence movement, and it united all the
elites in opposition. If independence allowed popular participation in
politics, the local elites, not just Spaniards, were against it.
Consequentially, Mexican elites viewed the Cadiz Constitution, which
opened the way to popular participation, with extreme skepticism;
they would never recognize its legitimacy.

In 1815, as Napoleon’s European empire collapsed, King Ferdinand
VII returned to power and the Cadiz Constitution was abrogated. As
the Spanish Crown began trying to reclaim its American colonies, it
did not face a problem with loyalist Mexico. Yet, in 1820, a Spanish
army that had assembled in Cadiz to sail to the Americas to help
restore Spanish authority mutinied against Ferdinand VII. They were
soon joined by army units throughout the country, and Ferdinand was
forced to restore the Cadiz Constitution and recall the Cortes. This
Cortes was even more radical than the one that had written the Cadiz
Constitution, and it proposed abolishing all forms of labor coercion. It
also attacked special privileges — for example, the right of the military
to be tried for crimes in their own courts. Faced finally with the
imposition of this document in Mexico, the elites there decided that it
was better to go it alone and declare independence.

This independence movement was led by Augustin de Iturbide, who
had been an officer in the Spanish army. On February 24, 1821, he
published the Plan de Iguala, his vision for an independent Mexico.
The plan featured a constitutional monarchy with a Mexican emperor,
and removed the provisions of the Cadiz Constitution that Mexican
elites found so threatening to their status and privileges. It received
instantaneous support, and Spain quickly realized that it could not
stop the inevitable. But Iturbide did not just organize Mexican
secession. Recognizing the power vacuum, he quickly took advantage
of his military backing to have himself declared emperor, a position
that the great leader of South American independence Simon Bolivar
described as “by the grace of God and of bayonets.” Iturbide was not
constrained by the same political institutions that constrained
presidents of the United States; he quickly made himself a dictator,
and by October 1822 he had dismissed the constitutionally sanctioned

congress and replaced it with a junta of his choosing. Though Iturbide
did not last long, this pattern of events was to be repeated time and
time again in nineteenth-century Mexico.

The Constitution of the United States did not create a democracy by
modern standards. Who could vote in elections was left up to the
individual states to determine. While northern states quickly
conceded the vote to all white men irrespective of how much income
they earned or property they owned, southern states did so only
gradually. No state enfranchised women or slaves, and as property
and wealth restrictions were lifted on white men, racial franchises
explicitly disenfranchising black men were introduced. Slavery, of
course, was deemed constitutional when the Constitution of the
United States was written in Philadelphia, and the most sordid
negotiation concerned the division of the seats in the House of
Representatives among the states. These were to be allocated on the
basis of a state’s population, but the congressional representatives of
southern states then demanded that the slaves be counted.
Northerners objected. The compromise was that in apportioning seats
to the House of Representatives, a slave would count as three-fifths of
a free person. The conflicts between the North and South of the
United States were repressed during the constitutional process as the
three-fifths rule and other compromises were worked out. New fixes
were added over time — for example, the Missouri Compromise, an
arrangement where one proslavery and one antislavery state were
always added to the union together, to keep the balance in the Senate
between those for and those against slavery. These fudges kept the
political institutions of the United States working peacefully until the
Civil War finally resolved the conflicts in favor of the North.

The Civil War was bloody and destructive. But both before and
after it there were ample economic opportunities for a large fraction
of the population, especially in the northern and western United
States. The situation in Mexico was very different. If the United States
experienced five years of political instability between 1860 and 1865,
Mexico experienced almost nonstop instability for the first fifty years
of independence. This is best illustrated via the career of Antonio

Lopez de Santa Ana.

Santa Ana, son of a colonial official in Veracruz, came to
prominence as a soldier fighting for the Spanish in the independence
wars. In 1821 he switched sides with Iturbide and never looked back.
He became president of Mexico for the first time in May of 1833,
though he exercised power for less than a month, preferring to let
Valentin Gomez Farias act as president. Gomez Farias’s presidency
lasted fifteen days, after which Santa Ana retook power. This was as
brief as his first spell, however, and he was again replaced by Gomez
Farias, in early July. Santa Ana and Gomez Farias continued this
dance until the middle of 1835, when Santa Ana was replaced by
Miguel Barragan. But Santa Ana was not a quitter. He was back as
president in 1839, 1841, 1844, 1847, and, finally, between 1853 and
1855. In all, he was president eleven times, during which he presided
over the loss of the Alamo and Texas and the disastrous Mexican-
American War, which led to the loss of what became New Mexico and
Arizona. Between 1824 and 1867 there were fifty-two presidents in
Mexico, few of whom assumed power according to any
constitutionally sanctioned procedure.

The consequence of this unprecedented political instability for
economic institutions and incentives should be obvious. Such
instability led to highly insecure property rights. It also led to a
severe weakening of the Mexican state, which now had little
authority and little ability to raise taxes or provide public services.
Indeed, even though Santa Ana was president in Mexico, large parts
of the country were not under his control, which enabled the
annexation of Texas by the United States. In addition, as we just saw,
the motivation behind the Mexican declaration of independence was
to protect the set of economic institutions developed during the
colonial period, which had made Mexico, in the words of the great
German explorer and geographer of Latin America Alexander von
Humbolt, “the country of inequality.” These institutions, by basing
the society on the exploitation of indigenous people and the creation
of monopolies, blocked the economic incentives and initiatives of the
great mass of the population. As the United States began to

experience the Industrial Revolution in the first half of the nineteenth
century, Mexico got poorer.

Having an Idea, Starting a Firm, and Getting a Loan

The Industrial Revolution started in England. Its first success was to
revolutionize the production of cotton cloth using new machines
powered by water wheels and later by steam engines. Mechanization
of cotton production massively increased the productivity of workers
in, first, textiles and, subsequently, other industries. The engine of
technological breakthroughs throughout the economy was innovation,
spearheaded by new entrepreneurs and businessmen eager to apply
their new ideas. This initial flowering soon spread across the North
Atlantic to the United States. People saw the great economic
opportunities available in adopting the new technologies developed in
England. They were also inspired to develop their own inventions.

We can try to understand the nature of these inventions by looking
at who was granted patents. The patent system, which protects
property rights in ideas, was systematized in the Statute of
Monopolies legislated by the English Parliament in 1623, partially as
an attempt to stop the king from arbitrarily granting “letters patent”
to whomever he wanted — effectively granting exclusive rights to
undertake certain activities or businesses. The striking thing about the
evidence on patenting in the United States is that people who were
granted patents came from all sorts of backgrounds and all walks of
life, not just the rich and the elite. Many made fortunes based on their
patents. Take Thomas Edison, the inventor of the phonogram and the
lightbulb and the founder of General Electric, still one of the world’s
largest companies. Edison was the last of seven children. His father,
Samuel Edison, followed many occupations, from splitting shingles
for roofs to tailoring to keeping a tavern. Thomas had little formal
schooling but was homeschooled by his mother.

Between 1820 and 1845, only 19 percent of patentees in the United
States had parents who were professionals or were from recognizable
major landowning families. During the same period, 40 percent of

those who took out patents had only primary schooling or less, just
like Edison. Moreover, they often exploited their patent by starting a
firm, again like Edison. Just as the United States in the nineteenth
century was more democratic politically than almost any other nation
in the world at the time, it was also more democratic than others
when it came to innovation. This was critical to its path to becoming
the most economically innovative nation in the world.

If you were poor with a good idea, it was one thing to take out a
patent, which was not so expensive, after all. It was another thing
entirely to use that patent to make money. One way, of course, was to
sell the patent to someone else. This is what Edison did early on, to
raise some capital, when he sold his Quadruplex telegraph to Western
Union for $10,000. But selling patents was a good idea only for
someone like Edison, who had ideas faster than he could put them to
practice. (He had a world-record 1,093 patents issued to him in the
United States and 1,500 worldwide.) The real way to make money
from a patent was to start your own business. But to start a business,
you need capital, and you need banks to lend the capital to you.

Inventors in the United States were once again fortunate. During
the nineteenth century there was a rapid expansion of financial
intermediation and banking that was a crucial facilitator of the rapid
growth and industrialization that the economy experienced. While in
1818 there were 338 banks in operation in the United States, with
total assets of $160 million, by 1914 there were 27,864 banks, with
total assets of $27.3 billion. Potential inventors in the United States
had ready access to capital to start their businesses. Moreover, the
intense competition among banks and financial institutions in the
United States meant that this capital was available at fairly low
interest rates.

The same was not true in Mexico. In fact, in 1910, the year in
which the Mexican Revolution started, there were only forty-two
banks in Mexico, and two of these controlled 60 percent of total
banking assets. Unlike in the United States, where competition was
fierce, there was practically no competition among Mexican banks.
This lack of competition meant that the banks were able to charge

their customers very high interest rates, and typically confined
lending to the privileged and the already wealthy, who would then
use their access to credit to increase their grip over the various
sectors of the economy.

The form that the Mexican banking industry took in the nineteenth
and twentieth centuries was a direct result of the postindependence
political institutions of the country. The chaos of the Santa Ana era
was followed by an abortive attempt by the French government of
Emperor Napoleon II to create a colonial regime in Mexico under
Emperor Maximilian between 1864 and 1867. The French were
expelled, and a new constitution was written. But the government
formed first by Benito Juarez and, after his death, by Sebastian Lerdo
de Tejada was soon challenged by a young military man named
Porfirio Diaz. Diaz had been a victorious general in the war against
the French and had developed aspirations of power. He formed a
rebel army and, in November of 1876, defeated the army of the
government at the Battle of Tecoac. In May of the next year, he had
himself elected president. He went on to rule Mexico in a more or less
unbroken and increasingly authoritarian fashion until his overthrow
at the outbreak of the revolution thirty-four years later.

Like Iturbide and Santa Ana before him, Diaz started life as a
military commander. Such a career path into politics was certainly
known in the United States. The first president of the United States,
George Washington, was also a successful general in the War of
Independence. Ulysses S. Grant, one of the victorious Union generals
of the Civil War, became president in 1869, and Dwight D.
Eisenhower, the supreme commander of the Allied Forces in Europe
during the Second World War, was president of the United States
between 1953 and 1961. Unlike Iturbide, Santa Ana, and Diaz,
however, none of these military men used force to get into power.
Nor did they use force to avoid having to relinquish power. They
abided by the Constitution. Though Mexico had constitutions in the
nineteenth century, they put few constraints on what Iturbide, Santa
Ana, and Diaz could do. These men could be removed from power
only the same way they had attained it: by the use of force.

Diaz violated people’s property rights, facilitating the expropriation
of vast amounts of land, and he granted monopolies and favors to his
supporters in all lines of business, including banking. There was
nothing new about this behavior. This is exactly what Spanish
conquistadors had done, and what Santa Ana did in their footsteps.

The reason that the United States had a banking industry that was
radically better for the economic prosperity of the country had
nothing to do with differences in the motivation of those who owned
the banks. Indeed, the profit motive, which underpinned the
monopolistic nature of the banking industry in Mexico, was present in
the United States, too. But this profit motive was channeled
differently because of the radically different U.S. institutions. The
bankers faced different economic institutions, institutions that
subjected them to much greater competition. And this was largely
because the politicians who wrote the rules for the bankers faced very
different incentives themselves, forged by different political
institutions. Indeed, in the late eighteenth century, shortly after the
Constitution of the United States came into operation, a banking
system looking similar to that which subsequently dominated Mexico
began to emerge. Politicians tried to set up state banking monopolies,
which they could give to their friends and partners in exchange for
part of the monopoly profits. The banks also quickly got into the
business of lending money to the politicians who regulated them, just
as in Mexico. But this situation was not sustainable in the United
States, because the politicians who attempted to create these banking
monopolies, unlike their Mexican counterparts, were subject to
election and reelection. Creating banking monopolies and giving
loans to politicians is good business for politicians, if they can get
away with it. It is not particularly good for the citizens, however.
Unlike in Mexico, in the United States the citizens could keep
politicians in check and get rid of ones who would use their offices to
enrich themselves or create monopolies for their cronies. In
consequence, the banking monopolies crumbled. The broad
distribution of political rights in the United States, especially when
compared to Mexico, guaranteed equal access to finance and loans.

This in turn ensured that those with ideas and inventions could
benefit from them.

Path-Dependent Change

The world was changing in the 1870s and ’80s. Latin America was no
exception. The institutions that Porfirio Diaz established were not
identical to those of Santa Ana or the Spanish colonial state. The
world economy boomed in the second half of the nineteenth century,
and innovations in transportation such as the steamship and the
railway led to a huge expansion of international trade. This wave of
globalization meant that resource-rich countries such as Mexico — or,
more appropriately, the elites in such countries — could enrich
themselves by exporting raw materials and natural resources to
industrializing North America or Western Europe. Diaz and his
cronies thus found themselves in a different and rapidly evolving
world. They realized that Mexico had to change, too. But this didn’t
mean uprooting the colonial institutions and replacing them with
institutions similar to those in the United States. Instead, theirs was
“path-dependent” change leading only to the next stage of the
institutions that had already made much of Latin America poor and
unequal.

Globalization made the large open spaces of the Americas, its “open
frontiers,” valuable. Often these frontiers were only mythically open,
since they were inhabited by indigenous peoples who were brutally
dispossessed. All the same, the scramble for this newly valuable
resource was one of the defining processes of the Americas in the
second half of the nineteenth century. The sudden opening of this
valuable frontier led not to parallel processes in the United States and
Latin America, but to a further divergence, shaped by the existing
institutional differences, especially those concerning who had access
to the land. In the United States a long series of legislative acts,
ranging from the Land Ordinance of 1785 to the Homestead Act of
1862, gave broad access to frontier lands. Though indigenous peoples
had been sidelined, this created an egalitarian and economically

dynamic frontier. In most Latin American countries, however, the
political institutions there created a very different outcome. Frontier
lands were allocated to the politically powerful and those with wealth
and contacts, making such people even more powerful.

Diaz also started to dismantle many of the specific colonial
institutional legacies preventing international trade, which he
anticipated could greatly enrich him and his supporters. His model,
however, continued to be not the type of economic development he
saw north of the Rio Grande but that of Cortes, Pizarro, and de
Toledo, where the elite would make huge fortunes while the rest were
excluded. When the elite invested, the economy would grow a little,
but such economic growth was always going to be disappointing. It
also came at the expense of those lacking rights in this new order,
such as the Yaqui people of Sonora, in the hinterland of Nogales.
Between 1900 and 1910, possibly thirty thousand Yaqui were
deported, essentially enslaved, and sent to work in the henequen
plantations of Yucatan. (The fibers of the henequen plant were a
valuable export, since they could be used to make rope and twine.)

The persistence into the twentieth century of a specific institutional
pattern inimical to growth in Mexico and Latin America is well
illustrated by the fact that, just as in the nineteenth century, the
pattern generated economic stagnation and political instability, civil
wars and coups, as groups struggled for the benefits of power. Diaz
finally lost power to revolutionary forces in 1910. The Mexican
Revolution was followed by others in Bolivia in 1952, Cuba in 1959,
and Nicaragua in 1979. Meanwhile, sustained civil wars raged in
Colombia, El Salvador, Guatemala, and Peru. Expropriation or the
threat of expropriation of assets continued apace, with mass agrarian
reforms (or attempted reforms) in Bolivia, Brazil, Chile, Colombia,
Guatemala, Peru, and Venezuela. Revolutions, expropriations, and
political instability came along with military governments and
various types of dictatorships. Though there was also a gradual drift
toward greater political rights, it was only in the 1990s that most
Latin American countries became democracies, and even then they
remain mired in instability.

This instability was accompanied by mass repression and murder.
The 1991 National Commission for Truth and Reconciliation Report
in Chile determined that 2,279 persons were killed for political
reasons during the Pinochet dictatorship between 1973 and 1990.
Possibly 50,000 were imprisoned and tortured, and hundreds of
thousands of people were fired from their jobs. The Guatemalan
Commission for Historical Clarification Report in 1999 identified a
total of 42,275 named victims, though others have claimed that as
many as 200,000 were murdered in Guatemala between 1962 and
1996, 70,000 during the regime of General Efrain Rios Montt, who
was able to commit these crimes with such impunity that he could
run for president in 2003; fortunately he did not win. The National
Commission on the Disappearance of Persons in Argentina put the
number of people murdered by the military there at 9,000 persons
from 1976 to 1983, although it noted that the actual number could be
higher. (Estimates by human rights organizations usually place it at
30,000.)

Making a Billion or Two

The enduring implications of the organization of colonial society and
those societies’ institutional legacies shape the modern differences
between the United States and Mexico, and thus the two parts of
Nogales. The contrast between how Bill Gates and Carlos Slim became
the two richest men in the world — Warren Buffett is also a contender
— illustrates the forces at work. The rise of Gates and Microsoft is well
known, but Gates’s status as the world’s richest person and the
founder of one of the most technologically innovative companies did
not stop the U.S. Department of Justice from filing civil actions
against the Microsoft Corporation on May 8, 1998, claiming that
Microsoft had abused monopoly power. Particularly at issue was the
way that Microsoft had tied its Web browser, Internet Explorer, to its
Windows operating system. The government had been keeping an eye
on Gates for quite some time, and as early as 1991, the Federal Trade
Commission had launched an inquiry into whether Microsoft was

abusing its monopoly on PC operating systems. In November 2001,
Microsoft reached a deal with the Justice Department. It had its wings
clipped, even if the penalties were less than many demanded.

In Mexico, Carlos Slim did not make his money by innovation.
Initially he excelled in stock market deals, and in buying and
revamping unprofitable firms. His major coup was the acquisition of
Telmex, the Mexican telecommunications monopoly that was
privatized by President Carlos Salinas in 1990. The government
announced its intention to sell 51 percent of the voting stock (20.4
percent of total stock) in the company in September 1989 and
received bids in November 1990. Even though Slim did not put in the
highest bid, a consortium led by his Grupo Corso won the auction.
Instead of paying for the shares right away, Slim managed to delay
payment, using the dividends of Telmex itself to pay for the stock.
What was once a public monopoly now became Slim’s monopoly, and
it was hugely profitable.

The economic institutions that made Carlos Slim who he is are very
different from those in the United States. If you’re a Mexican
entrepreneur, entry barriers will play a crucial role at every stage of
your career. These barriers include expensive licenses you have to
obtain, red tape you have to cut through, politicians and incumbents
who will stand in your way, and the difficulty of getting funding from
a financial sector often in cahoots with the incumbents you’re trying
to compete against. These barriers can be either insurmountable,
keeping you out of lucrative areas, or your greatest friend, keeping
your competitors at bay. The difference between the two scenarios is
of course whom you know and whom you can influence — and yes,
whom you can bribe. Carlos Slim, a talented, ambitious man from a
relatively modest background of Lebanese immigrants, has been a
master at obtaining exclusive contracts; he managed to monopolize
the lucrative telecommunications market in Mexico, and then to
extend his reach to the rest of Latin America.

There have been challenges to Slim’s Telmex monopoly. But they
have not been successful. In 1996 Avantel, a long-distance phone
provider, petitioned the Mexican Competition Commission to check

whether Telmex had a dominant position in the telecommunications
market. In 1997 the commission declared that Telmex had substantial
monopoly power with respect to local telephony, national long-
distance calls, and international long-distance calls, among other
things. But attempts by the regulatory authorities in Mexico to limit
these monopolies have come to nothing. One reason is that Slim and
Telmex can use what is known as a recurso de amparo, literally an
“appeal for protection.” An amparo is in effect a petition to argue that
a particular law does not apply to you. The idea of the amparo dates
back to the Mexican constitution of 1857 and was originally intended
as a safeguard of individual rights and freedoms. In the hands of
Telmex and other Mexican monopolies, however, it has become a
formidable tool for cementing monopoly power. Rather than
protecting people’s rights, the amparo provides a loophole in equality
before the law.

Slim has made his money in the Mexican economy in large part
thanks to his political connections. When he has ventured into the
United States, he has not been successful. In 1999 his Grupo Curso
bought the computer retailer CompUSA. At the time, CompUSA had
given a franchise to a firm called COC Services to sell its merchandise
in Mexico. Slim immediately violated this contract with the intention
of setting up his own chain of stores, without any competition from
COC. But COC sued CompUSA in a Dallas court. There are no amparos
in Dallas, so Slim lost, and was fined $454 million. The lawyer for
COC, Mark Werner, noted afterward that “the message of this verdict
is that in this global economy, firms have to respect the rules of the
United States if they want to come here.” When Slim was subject to
the institutions of the United States, his usual tactics for making
money didn’t work.

Toward a Theory of World Inequality

We live in an unequal world. The differences among nations are
similar to those between the two parts of Nogales, just on a larger
scale. In rich countries, individuals are healthier, live longer, and are

much better educated. They also have access to a range of amenities
and options in life, from vacations to career paths, that people in poor
countries can only dream of. People in rich countries also drive on
roads without potholes, and enjoy toilets, electricity, and running
water in their houses. They also typically have governments that do
not arbitrarily arrest or harass them; on the contrary, the
governments provide services, including education, health care,
roads, and law and order. Notable, too, is the fact that the citizens
vote in elections and have some voice in the political direction their
countries take.

The great differences in world inequality are evident to everyone,
even to those in poor countries, though many lack access to television
or the Internet. It is the perception and reality of these differences
that drive people to cross the Rio Grande or the Mediterranean Sea
illegally to have the chance to experience rich-country living
standards and opportunities. This inequality doesn’t just have
consequences for the lives of individual people in poor countries; it
also causes grievances and resentment, with huge political
consequences in the United States and elsewhere. Understanding why
these differences exist and what causes them is our focus in this book.
Developing such an understanding is not just an end in itself, but also
a first step toward generating better ideas about how to improve the
lives of billions who still live in poverty.

The disparities on the two sides of the fence in Nogales are just the
tip of the iceberg. As in the rest of northern Mexico, which benefits
from trade with the United States, even if not all of it is legal, the
residents of Nogales are more prosperous than other Mexicans, whose
average annual household income is around $5,000. This greater
relative prosperity of Nogales, Sonora, comes from maquiladora
manufacturing plants centered in industrial parks, the first of which
was started by Richard Campbell, Jr., a California basket
manufacturer. The first tenant was Coin-Art, a musical instrument
company owned by Richard Bosse, owner of the Artley flute and
saxophone company in Nogales, Arizona. Coin-Art was followed by
Memorex (computer wiring); Avent (hospital clothing); Grant

(sunglasses); Chamberlain (a manufacturer of garage door openers for
Sears); and Samsonite (suitcases). Significantly, all are U.S. -based
businesses and businessmen, using U.S. capital and know-how. The
greater prosperity of Nogales, Sonora, relative to the rest of Mexico,
therefore, comes from outside.

The differences between the United States and Mexico are in turn
small compared with those across the entire globe. The average
citizen of the United States is seven times as prosperous as the
average Mexican and more than ten times as the resident of Peru or
Central America. She is about twenty times as prosperous as the
average inhabitant of sub-Saharan Africa, and almost forty times as
those living in the poorest African countries such as Mali, Ethiopia,
and Sierra Leone. And it’s not just the United States. There is a small
but growing group of rich countries — mostly in Europe and North
America, joined by Australia, Japan, New Zealand, Singapore, South
Korea, and Taiwan — whose citizens enjoy very different lives from
those of the inhabitants of the rest of the globe.

The reason that Nogales, Arizona, is much richer than Nogales,
Sonora, is simple; it is because of the very different institutions on the
two sides of the border, which create very different incentives for the
inhabitants of Nogales, Arizona, versus Nogales, Sonora. The United
States is also far richer today than either Mexico or Peru because of
the way its institutions, both economic and political, shape the
incentives of businesses, individuals, and politicians. Each society
functions with a set of economic and political rules created and
enforced by the state and the citizens collectively. Economic
institutions shape economic incentives: the incentives to become
educated, to save and invest, to innovate and adopt new technologies,
and so on. It is the political process that determines what economic
institutions people live under, and it is the political institutions that
determine how this process works. For example, it is the political
institutions of a nation that determine the ability of citizens to control
politicians and influence how they behave. This in turn determines
whether politicians are agents of the citizens, albeit imperfect, or are
able to abuse the power entrusted to them, or that they have usurped,

to amass their own fortunes and to pursue their own agendas, ones
detrimental to those of the citizens. Political institutions include but
are not limited to written constitutions and to whether the society is a
democracy. They include the power and capacity of the state to
regulate and govern society. It is also necessary to consider more
broadly the factors that determine how political power is distributed
in society, particularly the ability of different groups to act
collectively to pursue their objectives or to stop other people from
pursuing theirs.

As institutions influence behavior and incentives in real life, they
forge the success or failure of nations. Individual talent matters at
every level of society, but even that needs an institutional framework
to transform it into a positive force. Bill Gates, like other legendary
figures in the information technology industry (such as Paul Allen,
Steve Ballmer, Steve Jobs, Larry Page, Sergey Brin, and Jeff Bezos),
had immense talent and ambition. But he ultimately responded to
incentives. The schooling system in the United States enabled Gates
and others like him to acquire a unique set of skills to complement
their talents. The economic institutions in the United States enabled
these men to start companies with ease, without facing
insurmountable barriers. Those institutions also made the financing of
their projects feasible. The U.S. labor markets enabled them to hire
qualified personnel, and the relatively competitive market
environment enabled them to expand their companies and market
their products. These entrepreneurs were confident from the
beginning that their dream projects could be implemented: they
trusted the institutions and the rule of law that these generated and
they did not worry about the security of their property rights. Finally,
the political institutions ensured stability and continuity. For one
thing, they made sure that there was no risk of a dictator taking
power and changing the rules of the game, expropriating their wealth,
imprisoning them, or threatening their lives and livelihoods. They
also made sure that no particular interest in society could warp the
government in an economically disastrous direction, because political
power was both limited and distributed sufficiently broadly that a set

of economic institutions that created the incentives for prosperity
could emerge.

This book will show that while economic institutions are critical for
determining whether a country is poor or prosperous, it is politics and
political institutions that determine what economic institutions a
country has. Ultimately the good economic institutions of the United
States resulted from the political institutions that gradually emerged
after 1619. Our theory for world inequality shows how political and
economic institutions interact in causing poverty or prosperity, and
how different parts of the world ended up with such different sets of
institutions. Our brief review of the history of the Americas begins to
give a sense of the forces that shape political and economic
institutions. Different patterns of institutions today are deeply rooted
in the past because once society gets organized in a particular way,
this tends to persist. We’ll show that this fact comes from the way
that political and economic institutions interact.

This persistence and the forces that create it also explain why it is
so difficult to remove world inequality and to make poor countries
prosperous. Though institutions are the key to the differences
between the two Nogaleses and between Mexico and the United
States, that doesn’t mean there will be a consensus in Mexico to
change institutions. There is no necessity for a society to develop or
adopt the institutions that are best for economic growth or the
welfare of its citizens, because other institutions may be even better
for those who control politics and political institutions. The powerful
and the rest of society will often disagree about which set of
institutions should remain in place and which ones should be
changed. Carlos Slim would not have been happy to see his political
connections disappear and the entry barriers protecting his businesses
fizzle — no matter that the entry of new businesses would enrich
millions of Mexicans. Because there is no such consensus, what rules
society ends up with is determined by politics: who has power and
how this power can be exercised. Carlos Slim has the power to get
what he wants. Bill Gates’s power is far more limited. That’s why our
theory is about not just economics but also politics. It is about the

effects of institutions on the success and failure of nations — thus the
economics of poverty and prosperity; it is also about how institutions
are determined and change over time, and how they fail to change
even when they create poverty and misery for millions — thus the
politics of poverty and prosperity.

2 .

THEORIES THAT DON’T WORK

The Lay of the Land

The focus of our book is on explaining world inequality and also some

of the easily visible broad patterns that nest within it. The first
country to experience sustained economic growth was England — or
Great Britain, usually just Britain, as the union of England, Wales, and
Scotland after 1707 is known. Growth emerged slowly in the second
half of the eighteenth century as the Industrial Revolution, based on
major technological breakthroughs and their application in industry,
took root. Industrialization in England was soon followed by
industrialization in most of Western Europe and the United States.
English prosperity also spread rapidly to Britain’s “settler colonies” of
Canada, Australia, and New Zealand. A list of the thirty richest
countries today would include them, plus Japan, Singapore, and
South Korea. The prosperity of these latter three is in turn part of a
broader pattern in which many East Asian nations, including Taiwan
and subsequently China, have experienced recent rapid growth.

The bottom of the world income distribution paints as sharp and as
distinctive a picture as the top. If you instead make a list of the
poorest thirty countries in the world today, you will find almost all of
them in sub-Saharan Africa. They are joined by countries such as
Afghanistan, Haiti, and Nepal, which, though not in Africa, all share
something critical with African nations, as we’ll explain. If you went
back fifty years, the countries in the top and bottom thirty wouldn’t
be greatly different. Singapore and South Korea would not be among
the richest countries, and there would be several different countries in
the bottom thirty, but the overall picture that emerged would be

remarkably consistent with what we see today. Go back one hundred
years, or a hundred and fifty, and you’d find nearly the same
countries in the same groups.

Map 3 shows the lay of the land in 2008. The countries shaded in
the darkest color are the poorest in the world, those where average
per-capita incomes (called by economists GDP, gross domestic
product) are less than $2,000 annually. Most of Africa is in this color,
as are Afghanistan, Haiti, and parts of Southeast Asia (for example,
Cambodia and Laos). North Korea is also among this group of
countries. The countries in white are the richest, those with annual
income per-capita of $20,000 or more. Here we find the usual
suspects: North America, western Europe, Australasia, and Japan.

Another interesting pattern can be discerned in the Americas. Make
a list of the nations in the Americas from richest to poorest. You will
find that at the top are the United States and Canada, followed by
Chile, Argentina, Brazil, Mexico, and Uruguay, and maybe also
Venezuela, depending on the price of oil. After that you have
Colombia, the Dominican Republic, Ecuador, and Peru. At the bottom
there is another distinct, much poorer group, comprising Bolivia,
Guatemala, and Paraguay. Go back fifty years, and you’ll find an
identical ranking. One hundred years: same thing. One hundred and
fifty years: again the same. So it is not just that the United States and
Canada are richer than Latin America; there is also a definite and
persistent divide between the rich and poor nations within Latin
America.

A final interesting pattern is in the Middle East. There we find oil-
rich nations such as Saudi Arabia and Kuwait, which have income
levels close to those of our top thirty. Yet if the oil price fell, they
would quickly fall back down the table. Middle Eastern countries with
little or no oil, such as Egypt, Jordan, and Syria, all cluster around a
level of income similar to that of Guatemala or Peru. Without oil,
Middle Eastern countries are also all poor, though, like those in
Central America and the Andes, not so poor as those in sub-Saharan
Africa.

While there is a lot of persistence in the patterns of prosperity we

see around us today, these patterns are not unchanging or immutable.
First, as we have already emphasized, most of current world
inequality emerged since the late eighteenth century, following on the
tails of the Industrial Revolution. Not only were gaps in prosperity
much smaller as late as the middle of the eighteenth century, but the
rankings which have been so stable since then are not the same when
we go further back in history. In the Americas, for example, the
ranking we see for the last hundred and fifty years was completely
different five hundred years ago. Second, many nations have
experienced several decades of rapid growth, such as much of East
Asia since the Second World War and, more recently, China. Many of
these subsequently saw that growth go into reverse. Argentina, for
example, grew rapidly for five decades up until 1920, becoming one
of the richest countries in the world, but then started a long slide. The
Soviet Union is an even more noteworthy example, growing rapidly
between 1930 and 1970, but subsequently experiencing a rapid
collapse.

What explains these major differences in poverty and prosperity
and the patterns of growth? Why did Western European nations and
their colonial offshoots filled with European settlers start growing in
the nineteenth century, scarcely looking back? What explains the

persistent ranking of inequality within the Americas? Why have sub-
Saharan African and Middle Eastern nations failed to achieve the type
of economic growth seen in Western Europe, while much of East Asia
has experienced breakneck rates of economic growth?

One might think that the fact that world inequality is so huge and
consequential and has such sharply drawn patterns would mean that
it would have a well-accepted explanation. Not so. Most hypotheses
that social scientists have proposed for the origins of poverty and
prosperity just don’t work and fail to convincingly explain the lay of
the land.

The Geography Hypothesis

One widely accepted theory of the causes of world inequality is the
geography hypothesis, which claims that the great divide between
rich and poor countries is created by geographical differences. Many
poor countries, such as those of Africa, Central America, and South
Asia, are between the tropics of Cancer and Capricorn. Rich nations,
in contrast, tend to be in temperate latitudes. This geographic
concentration of poverty and prosperity gives a superficial appeal to
the geography hypothesis, which is the starting point of the theories
and views of many social scientists and pundits alike. But this doesn’t
make it any less wrong.

As early as the late eighteenth century, the great French political
philosopher Montesquieu noted the geographic concentration of
prosperity and poverty, and proposed an explanation for it. He argued
that people in tropical climates tended to be lazy and to lack
inquisitiveness. As a consequence, they didn’t work hard and were
not innovative, and this was the reason why they were poor.
Montesquieu also speculated that lazy people tended to be ruled by
despots, suggesting that a tropical location could explain not just
poverty but also some of the political phenomena associated with
economic failure, such as dictatorship.

The theory that hot countries are intrinsically poor, though
contradicted by the recent rapid economic advance of countries such

as Singapore, Malaysia, and Botswana, is still forcefully advocated by
some, such as the economist Jeffrey Sachs. The modern version of this
view emphasizes not the direct effects of climate on work effort or
thought processes, but two additional arguments: first, that tropical
diseases, particularly malaria, have very adverse consequences for
health and therefore labor productivity; and second, that tropical soils
do not allow for productive agriculture. The conclusion, though, is
the same: temperate climates have a relative advantage over tropical
and semitropical areas.

World inequality, however, cannot be explained by climate or
diseases, or any version of the geography hypothesis. Just think of
Nogales. What separates the two parts is not climate, geography, or
disease environment, but the U.S. -Mexico border.

If the geography hypothesis cannot explain differences between the
north and south of Nogales, or North and South Korea, or those
between East and West Germany before the fall of the Berlin Wall,
could it still be a useful theory for explaining differences between
North and South America? Between Europe and Africa? Simply, no.

History illustrates that there is no simple or enduring connection
between climate or geography and economic success. For instance, it
is not true that the tropics have always been poorer than temperate
latitudes. As we saw in the last chapter, at the time of the conquest of
the Americas by Columbus, the areas south of the Tropic of Cancer
and north of the Tropic of Capricorn, which today include Mexico,
Central America, Peru, and Bolivia, held the great Aztec and Inca
civilizations. These empires were politically centralized and complex,
built roads, and provided famine relief. The Aztecs had both money
and writing, and the Incas, even though they lacked both these two
key technologies, recorded vast amounts of information on knotted
ropes called quipus. In sharp contrast, at the time of the Aztecs and
Incas, the north and south of the area inhabited by the Aztecs and
Incas, which today includes the United States, Canada, Argentina, and
Chile, were mostly inhabited by Stone Age civilizations lacking these
technologies. The tropics in the Americas were thus much richer than
the temperate zones, suggesting that the “obvious fact” of tropical

poverty is neither obvious nor a fact. Instead, the greater riches in the
United States and Canada represent a stark reversal of fortune relative
to what was there when the Europeans arrived.

This reversal clearly had nothing to do with geography and, as we
have already seen, something to do with the way these areas were
colonized. This reversal was not confined to the Americas. People in
South Asia, especially the Indian subcontinent, and in China were
more prosperous than those in many other parts of Asia and certainly
more than the peoples inhabiting Australia and New Zealand. This,
too, was reversed, with South Korea, Singapore, and Japan emerging
as the richest nations in Asia, and Australia and New Zealand
surpassing almost all of Asia in terms of prosperity. Even within sub-
Saharan Africa there was a similar reversal. More recently, before the
start of intense European contact with Africa, the southern Africa
region was the most sparsely settled and the farthest from having
developed states with any kind of control over their territories. Yet
South Africa is now one of the most prosperous nations in sub-
Saharan Africa. Further back in history we again see much prosperity
in the tropics; some of the great premodern civilizations, such as
Angkor in modern Cambodia, Vijayanagara in southern India, and
Aksum in Ethiopia, flourished in the tropics, as did the great Indus
Valley civilizations of Mohenjo Daro and Harappa in modern
Pakistan. History thus leaves little doubt that there is no simple
connection between a tropical location and economic success.

Tropical diseases obviously cause much suffering and high rates of
infant mortality in Africa, but they are not the reason Africa is poor.
Disease is largely a consequence of poverty and of governments being
unable or unwilling to undertake the public health measures
necessary to eradicate them. England in the nineteenth century was
also a very unhealthy place, but the government gradually invested in
clean water, in the proper treatment of sewage and effluent, and,
eventually, in an effective health service. Improved health and life
expectancy were not the cause of England’s economic success but one
of the fruits of its previous political and economic changes. The same
is true for Nogales, Arizona.

The other part of the geography hypothesis is that the tropics are
poor because tropical agriculture is intrinsically unproductive.
Tropical soils are thin and unable to maintain nutrients, the argument
goes, and emphasizes how quickly these soils are eroded by torrential
rains. There certainly is some merit in this argument, but as we’ll
show, the prime determinant of why agricultural productivity —
agricultural output per acre — is so low in many poor countries,
particularly in sub-Saharan Africa, has little to do with soil quality.
Rather, it is a consequence of the ownership structure of the land and
the incentives that are created for farmers by the governments and
institutions under which they live. We will also show that world
inequality cannot be explained by differences in agricultural
productivity. The great inequality of the modern world that emerged
in the nineteenth century was caused by the uneven dissemination of
industrial technologies and manufacturing production. It was not
caused by divergence in agricultural performance.

Another influential version of the geography hypothesis is
advanced by the ecologist and evolutionary biologist Jared Diamond.
He argues that the origins of intercontinental inequality at the start of
the modern period, five hundred years ago, rested in different
historical endowments of plant and animal species, which
subsequently influenced agricultural productivity. In some places,
such as the Fertile Crescent in the modern Middle East, there were a
large number of species that could be domesticated by humans.
Elsewhere, such as the Americas, there were not. Having many
species capable of being domesticated made it very attractive for
societies to make the transition from a hunter-gatherer to a farming
lifestyle. As a consequence, farming developed earlier in the Fertile
Crescent than in the Americas. Population density grew, allowing
specialization of labor, trade, urbanization, and political
development. Crucially, in places where farming dominated,
technological innovation took place much more rapidly than in other
parts of the world. Thus, according to Diamond, the differential
availability of animal and plant species created differential intensities
of farming, which led to different paths of technological change and

prosperity across different continents.

Though Diamond’s thesis is a powerful approach to the puzzle on
which he focuses, it cannot be extended to explain modern world
inequality. For example, Diamond argues that the Spanish were able
to dominate the civilizations of the Americas because of their longer
history of farming and consequent superior technology. But we now
need to explain why the Mexicans and Peruvians inhabiting the
former lands of the Aztecs and Incas are poor. While having access to
wheat, barley, and horses might have made the Spanish richer than
the Incas, the gap in incomes between the two was not very large.
The average income of a Spaniard was probably less than double that
of a citizen of the Inca Empire. Diamond’s thesis implies that once the
Incas had been exposed to all the species and resulting technologies
that they had not been able to develop themselves, they ought quickly
to have attained the living standards of the Spanish. Yet nothing of
the sort happened. On the contrary, in the nineteenth and twentieth
centuries, a much larger gap in incomes between Spain and Peru
emerged. Today the average Spaniard is more than six times richer
than the average Peruvian. This gap in incomes is closely connected
to the uneven dissemination of modern industrial technologies, but
this has little to do either with the potential for animal and plant
domestication or with intrinsic agricultural productivity differences
between Spain and Peru.

While Spain, albeit with a lag, adopted the technologies of steam
power, railroads, electricity, mechanization, and factory production,
Peru did not, or at best did so very slowly and imperfectly. This
technological gap persists today and reproduces itself on a bigger
scale as new technologies, in particular those related to information
technology, fuel further growth in many developed and some rapidly
developing nations. Diamond’s thesis does not tell us why these
crucial technologies are not diffusing and equalizing incomes across
the world and does not explain why the northern half of Nogales is so
much richer than its twin just to the south of the fence, even though
both were part of the same civilization five hundred years ago.

The story of Nogales highlights another major problem in adapting

Diamond’s thesis: as we have already seen, whatever the drawbacks
of the Inca and Aztec empires were in 1532, Peru and Mexico were
undoubtedly more prosperous than those parts of the Americas that
went on to become the United States and Canada. North America
became more prosperous precisely because it enthusiastically adopted
the technologies and advances of the Industrial Revolution. The
population became educated and railways spread out across the Great
Plains in stark contrast to what happened in South America. This
cannot be explained by pointing to differential geographic
endowments of North and South America, which, if anything, favored
South America.

Inequality in the modern world largely results from the uneven
dissemination and adoption of technologies, and Diamond’s thesis
does include important arguments about this. For instance, he argues,
following the historian William McNeill, that the east-west
orientation of Eurasia enabled crops, animals, and innovations to
spread from the Fertile Crescent into Western Europe, while the
north-south orientation of the Americas accounts for why writing
systems, which were created in Mexico, did not spread to the Andes
or North America. Yet the orientation of continents cannot provide an
explanation for today’s world inequality. Consider Africa. Though the
Sahara Desert did present a significant barrier to the movement of
goods and ideas from the north to sub-Saharan Africa, this was not
insurmountable. The Portuguese, and then other Europeans, sailed
around the coast and eliminated differences in knowledge at a time
when gaps in incomes were very small compared with what they are
today. Since then, Africa has not caught up with Europe; on the
contrary, there is now a much larger income gap between most
African and European countries.

It should also be clear that Diamond’s argument, which is about
continental inequality, is not well equipped to explain variation
within continents — an essential part of modern world inequality. For
example, while the orientation of the Eurasian landmass might
explain how England managed to benefit from the innovations of the
Middle East without having to reinvent them, it doesn’t explain why

the Industrial Revolution happened in England rather than, say,
Moldova. In addition, as Diamond himself points out, China and India
benefited greatly from very rich suites of animals and plants, and
from the orientation of Eurasia. But most of the poor people of the
world today are in those two countries.

In fact, the best way to see the scope of Diamond’s thesis is in terms
of his own explanatory variables. Map 4 shows data on the
distribution of Sus scrofa, the ancestor of the modern pig, and the
aurochs, ancestor of the modern cow. Both species were widely
distributed throughout Eurasia and even North Africa. Map 5 (this
page) shows the distribution of some of the wild ancestors of modern
domesticated crops, such as Oryza sativa, the ancestor of Asian
cultivated rice, and the ancestors of modern wheat and barley. It
demonstrates that the wild ancestor of rice was distributed widely
across south and southeast Asia, while the ancestors of barley and
wheat were distributed along a long arc from the Levant, reaching
through Iran and into Afghanistan and the cluster of “stans”
(Turkmenistan, Tajikistan, and Krgyzistan). These ancestral species
are present in much of Eurasia. But their wide distribution suggests
that inequality within Eurasia cannot be explained by a theory based
on the incidence of the species.

The geography hypothesis is not only unhelpful for explaining the
origins of prosperity throughout history, and mostly incorrect in its
emphasis, but also unable to account for the lay of the land we
started this chapter with. One might argue that any persistent pattern,
such as the hierarchy of incomes within the Americas or the sharp
and long-ranging differences between Europe and the Middle East,
can be explained by unchanging geography. But this is not so. We
have already seen that the patterns within the Americas are highly
unlikely to have been driven by geographical factors. Before 1492 it
was the civilizations in the central valley of Mexico, Central America,
and the Andes that had superior technology and living standards to
North America or places such as Argentina and Chile. While the
geography stayed the same, the institutions imposed by European
colonists created a “reversal of fortune.” Geography is also unlikely to

explain the poverty of the Middle East for similar reasons. After all,
the Middle East led the world in the Neolithic Revolution, and the
first towns developed in modern Iraq. Iron was first smelted in
Turkey, and as late as the Middle Ages the Middle East was
technologically dynamic. It was not the geography of the Middle East
that made the Neolithic Revolution flourish in that part of the world,
as we will see in chapter 5, and it was, again, not geography that
made the Middle East poor. Instead, it was the expansion and
consolidation of the Ottoman Empire, and it is the institutional legacy
of this empire that keeps the Middle East poor today.

Map 4: The historical distribution of wild cattle and pigs

Russia

Rice: area of origin

— Rice: distribution of wild relatives
5? Wheat: area of origin

* Wheat: distribution of wild relatives
JK Barley: area of origin

• Barley: distribution of wild relatives
C . Modem boundaries

Map 5: The historical distribution of wild rice, wheat, and barley

Finally, geographic factors are unhelpful for explaining not only the
differences we see across various parts of the world today but also
why many nations such as Japan or China stagnate for long periods
and then start a rapid growth process. We need another, better
theory.

The Culture Hypothesis

The second widely accepted theory, the culture hypothesis, relates
prosperity to culture. The culture hypothesis, just like the geography
hypothesis, has a distinguished lineage, going back at least to the
great German sociologist Max Weber, who argued that the Protestant
Reformation and the Protestant ethic it spurred played a key role in
facilitating the rise of modern industrial society in Western Europe.
The culture hypothesis no longer relies solely on religion, but stresses

other types of beliefs, values, and ethics as well.

Though it is not politically correct to articulate in public, many
people still maintain that Africans are poor because they lack a good
work ethic, still believe in witchcraft and magic, or resist new
Western technologies. Many also believe that Latin America will
never be rich because its people are intrinsically profligate and
impecunious, and because they suffer from some “Iberian” or
“manana” culture. Of course, many once believed that the Chinese
culture and Confucian values were inimical to economic growth,
though now the importance of the Chinese work ethic as the engine
of growth in China, Hong Kong, and Singapore is trumpeted.

Is the culture hypothesis useful for understanding world inequality?
Yes and no. Yes, in the sense that social norms, which are related to
culture, matter and can be hard to change, and they also sometimes
support institutional differences, this book’s explanation for world
inequality. But mostly no, because those aspects of culture often
emphasized — religion, national ethics, African or Latin values — are
just not important for understanding how we got here and why the
inequalities in the world persist. Other aspects, such as the extent to
which people trust each other or are able to cooperate, are important
but they are mostly an outcome of institutions, not an independent
cause.

Let us go back to Nogales. As we noted earlier, many aspects of
culture are the same north and south of the fence. Nevertheless, there
may be some marked differences in practices, norms, and values,
though these are not causes but outcomes of the two places’ divergent
development paths. For example, in surveys Mexicans typically say
they trust other people less than the citizens of the United States say
they trust others. But it is not a surprise that Mexicans lack trust
when their government cannot eliminate drug cartels or provide a
functioning unbiased legal system. The same is true with North and
South Korea, as we discuss in the next chapter. The South is one of
the richest countries in the world, while the North grapples with
periodic famine and abject poverty. While “culture” is very different
between the South and the North today, it played no role in causing

the diverging economic fortunes of these two half nations. The
Korean peninsula has a long period of common history. Before the
Korean War and the division at the 38th parallel, it had an
unprecedented homogeneity in terms of language, ethnicity, and
culture. Just as in Nogales, what matters is the border. To the north is
a different regime, imposing different institutions, creating different
incentives. Any difference in culture between south and north of the
border cutting through the two parts of Nogales or the two parts of
Korea is thus not a cause of the differences in prosperity but, rather, a
consequence.

What about Africa and African culture? Historically, sub-Saharan
Africa was poorer than most other parts of the world, and its ancient
civilizations did not develop the wheel, writing (with the exception of
Ethiopia and Somalia), or the plow. Though these technologies were
not widely used until the advent of formal European colonization in
the late nineteenth and early twentieth century, African societies
knew about them much earlier. Europeans began sailing around the
west coast in the late fifteenth century, and Asians were continually
sailing to East Africa from much earlier times.

We can understand why these technologies were not adopted from
the history of the Kingdom of Kongo at the mouth of the Congo River,
which has given its name to the modern Democratic Republic of
Congo. Map 6 shows where the Kongo was along with another
important central African state, the Kuba Kingdom, which we discuss
later in the book.

Kongo came into intense contact with the Portuguese after it was
first visited by the mariner Diogo Cao in 1483. At the time, Kongo
was a highly centralized polity by African standards, whose capital,
Mbanza, had a population of sixty thousand, which made it about the
same size as the Portuguese capital of Lisbon and larger than London,
which had a population of about fifty thousand in 1500. The king of
Kongo, Nzinga a Nkuwu, converted to Catholicism and changed his
name to Joao I. Later Mbanza’s name was changed to Sao Salvador.
Thanks to the Portuguese, the Kongolese learned about the wheel and
the plow, and the Portuguese even encouraged their adoption with

agricultural missions in 1491 and 1512. But all these initiatives failed.
Still, the Kongolese were far from averse to modern technologies in
general. They were very quick to adopt one venerable Western
innovation: the gun. They used this new and powerful tool to respond
to market incentives: to capture and export slaves. There is no sign
here that African values or culture prevented the adoption of new
technologies and practices. As their contacts with Europeans
deepened, the Kongolese adopted other Western practices: literacy,
dress styles, and house designs. In the nineteenth century, many
African societies also took advantage of the rising economic
opportunities created by the Industrial Revolution by changing their
production patterns. In West Africa there was rapid economic
development based on the export of palm oil and ground nuts;
throughout southern Africa, Africans developed exports to the rapidly
expanding industrial and mining areas of the Rand in South Africa.
Yet these promising economic experiments were obliterated not by
African culture or the inability of ordinary Africans to act in their
own self-interest, but first by European colonialism and then by
postindependence African governments.

Nigeria

Central African

Republic

Cameroon

Gbadolite*

Equatorial Guinea /

r '

'

Sdo l om6

ii

and Principe

Gabon

/

Congo-Brazzaville r . -

Kinshasa

Ni>t« Kmgd.Mii

/ ”ushong

Kingdom of ihe Kongo

V

Modem boundaries

)

1 li stone kingdoms

Kasai River

I

1

Congo River

■

Map 6: Kingdom of die Kongo, Kuba Kingdom, die liusliong, and the Lele

The real reason that the Kongolese did not adopt superior
technology was because they lacked any incentives to do so. They
faced a high risk of all their output being expropriated and taxed by
the all-powerful king, whether or not he had converted to
Catholicism. In fact, it wasn’t only their property that was insecure.
Their continued existence was held by a thread. Many of them were
captured and sold as slaves — hardly the environment to encourage
investment to increase long-term productivity. Neither did the king
have incentives to adopt the plow on a large scale or to make
increasing agricultural productivity his main priority; exporting slaves
was so much more profitable.

It might be true today that Africans trust each other less than
people in other parts of the world. But this is an outcome of a long
history of institutions which have undermined human and property
rights in Africa. The potential to be captured and sold as a slave no
doubt influenced the extent to which Africans trusted others

historically.

What about Max Weber’s Protestant ethic? Though it may be true
that predominantly Protestant countries, such as the Netherlands and
England, were the first economic successes of the modern era, there is
little relationship between religion and economic success. France, a
predominantly Catholic country, quickly mimicked the economic
performance of the Dutch and English in the nineteenth century, and
Italy is as prosperous as any of these nations today. Looking farther
east, you’ll see that none of the economic successes of East Asia have
anything to do with any form of Christian religion, so there is not
much support for a special relationship between Protestantism and
economic success there, either.

Let’s turn to a favorite area for the enthusiasts of the culture
hypothesis: the Middle East. Middle Eastern countries are primarily
Islamic, and the non-oil producers among them are very poor, as we
have already noted. Oil producers are richer, but this windfall of
wealth has done little to create diversified modern economies in
Saudi Arabia or Kuwait. Don’t these facts show convincingly that
religion matters? Though plausible, this argument is not right, either.
Yes, countries such as Syria and Egypt are poor, and their populations
are primarily Muslim. But these countries also systemically differ in
other ways that are far more important for prosperity. For one, they
were all provinces of the Ottoman Empire, which heavily, and
adversely, shaped the way they developed. After Ottoman rule
collapsed, the Middle East was absorbed into the English and French
colonial empires, which, again, stunted their possibilities. After
independence, they followed much of the former colonial world by
developing hierarchical, authoritarian political regimes with few of
the political and economic institutions that, we will argue, are crucial
for generating economic success. This development path was forged
largely by the history of Ottoman and European rule. The relationship
between the Islamic religion and poverty in the Middle East is largely
spurious.

The role of these historical events, rather than cultural factors, in
shaping the Middle East’s economic trajectory is also seen in the fact

that the parts of the Middle East that temporarily broke away from
the hold of the Ottoman Empire and the European powers, such as
Egypt between 1805 and 1848 under Muhammad Ali, could embark
on a path of rapid economic change. Muhammad Ali usurped power
following the withdrawal of the French forces that had occupied
Egypt under Napoleon Bonaparte. Exploiting the weakness of the
Ottoman hold over the Egyptian territory at the time, he was able to
found his own dynasty, which would, in one form or another, rule
until the Egyptian Revolution under Nasser in 1952. Muhammad Ali’s
reforms, though coercive, did bring growth to Egypt as the state
bureaucracy, the army, and the tax system were modernized and
there was growth in agriculture and industry. Nevertheless, this
process of modernization and growth came to an end after Ali’s death,
as Egypt fell under European influence.

But perhaps this is the wrong way to think about culture. Maybe
the cultural factors that matter are not tied to religion but rather to
particular “national cultures.” Perhaps it is the influence of English
culture that is important and explains why countries such as the
United States, Canada, and Australia are so prosperous? Though this
idea sounds initially appealing, it doesn’t work, either. Yes, Canada
and the United States were English colonies, but so were Sierra Leone
and Nigeria. The variation in prosperity within former English
colonies is as great as that in the entire world. The English legacy is
not the reason for the success of North America.

There is yet one more version of the culture hypothesis: perhaps it
is not English versus non-English that matters but, rather, European
versus non-European. Could it be that Europeans are superior
somehow because of their work ethic, outlook on life, Judeo-Christian
values, or Roman heritage? It is true that Western Europe and North
America, filled primarily by people of European descent, are the most
prosperous parts of the world. Perhaps it is the superior European
cultural legacy that is at the root of prosperity — and the last refuge of
the culture hypothesis. Alas, this version of the culture hypothesis has
as little explanatory potential as the others. A greater proportion of
the population of Argentina and Uruguay, compared with the

population of Canada and the United States, is of European descent,
but Argentina’s and Uruguay’s economic performance leaves much to
be desired. Japan and Singapore never had more than a sprinkling of
inhabitants of European descent, yet they are as prosperous as many
parts of Western Europe.

China, despite many imperfections in its economic and political
system, has been the most rapidly growing nation of the past three
decades. Chinese poverty until Mao Zedong’s death had nothing to do
with Chinese culture; it was due to the disastrous way Mao organized
the economy and conducted politics. In the 1950s, he promoted the
Great Leap Forward, a drastic industrialization policy that led to mass
starvation and famine. In the 1960s, he propagated the Cultural
Revolution, which led to the mass persecution of intellectuals and
educated people — anyone whose party loyalty might be doubted. This
again led to terror and a huge waste of the society’s talent and
resources. In the same way, current Chinese growth has nothing to do
with Chinese values or changes in Chinese culture; it results from a
process of economic transformation unleashed by the reforms
implemented by Deng Xiaoping and his allies, who, after Mao
Zedong’s death, gradually abandoned socialist economic policies and
institutions, first in agriculture and then in industry.

Just like the geography hypothesis, the culture hypothesis is also
unhelpful for explaining other aspects of the lay of the land around us
today. There are of course differences in beliefs, cultural attitudes,
and values between the United States and Latin America, but just like
those that exist between Nogales, Arizona, and Nogales, Sonora, or
those between South and North Korea, these differences are a
consequence of the two places’ different institutions and institutional
histories. Cultural factors that emphasize how “Hispanic” or “Latin”
culture molded the Spanish Empire can’t explain the differences
within Latin America — for example, why Argentina and Chile are
more prosperous than Peru and Bolivia. Other types of cultural
arguments — for instance, those that stress contemporary indigenous
culture — fare equally badly. Argentina and Chile have few indigenous
people compared with Peru and Bolivia. Though this is true,

indigenous culture as an explanation does not work, either. Colombia,
Ecuador, and Peru have similar income levels, but Colombia has very
few indigenous people today, while Ecuador and Peru have many.
Finally, cultural attitudes, which are in general slow to change, are
unlikely to account by themselves for the growth miracles in East Asia
and China. Though institutions are persistent, too, in certain
circumstances they do change rapidly, as well see.

The Ignorance Hypothesis

The final popular theory for why some nations are poor and some are
rich is the ignorance hypothesis, which asserts that world inequality
exists because we or our rulers do not know how to make poor
countries rich. This idea is the one held by most economists, who take
their cue from the famous definition proposed by the English
economist Lionel Robbins in 1935 that “economics is a science which
studies human behavior as a relationship between ends and scarce
means which have alternative uses.”

It is then a small step to conclude that the science of economics
should focus on the best use of scarce means to satisfy social ends.
Indeed, the most famous theoretical result in economics, the so-called
First Welfare Theorem, identifies the circumstances under which the
allocation of resources in a “market economy” is socially desirable
from an economic point of view. A market economy is an abstraction
that is meant to capture a situation in which all individuals and firms
can freely produce, buy, and sell any products or services that they
wish. When these circumstances are not present there is a “market
failure.” Such failures provide the basis for a theory of world
inequality, since the more that market failures go unaddressed, the
poorer a country is likely to be. The ignorance hypothesis maintains
that poor countries are poor because they have a lot of market
failures and because economists and policymakers do not know how
to get rid of them and have heeded the wrong advice in the past. Rich
countries are rich because they have figured out better policies and
have successfully eliminated these failures.

Could the ignorance hypothesis explain world inequality? Could it
be that African countries are poorer than the rest of the world
because their leaders tend to have the same mistaken views of how to
run their countries, leading to the poverty there, while Western
European leaders are better informed or better advised, which
explains their relative success? While there are famous examples of
leaders adopting disastrous policies because they were mistaken
about those policies’ consequences, ignorance can explain at best a
small part of world inequality.

On the face of it, the sustained economic decline that soon set in in
Ghana after independence from Britain was caused by ignorance. The
British economist Tony Killick, then working as an adviser for the
government of Kwame Nkrumah, recorded many of the problems in
great detail. Nkrumah’s policies focused on developing state industry,
which turned out to be very inefficient. Killick recalled:

The footwear factory ... that would have linked the meat
factory in the North through transportation of the hides to
the South (for a distance of over 500 miles) to a tannery
(now abandoned); the leather was to have been
backhauled to the footwear factory in Kumasi, in the
center of the country and about 200 miles north of the
tannery. Since the major footwear market is in the Accra
metropolitan area, the shoes would then have to be
transported an additional 200 miles back to the South.

Killick somewhat understatedly remarks that this was an enterprise
“whose viability was undermined by poor siting.” The footwear
factory was one of many such projects, joined by the mango canning
plant situated in a part of Ghana which did not grow mangos and
whose output was to be more than the entire world demand for the
product. This endless stream of economically irrational developments
was not caused by the fact that Nkrumah or his advisers were badly
informed or ignorant of the right economic policies. They had people
like Killick and had even been advised by Nobel laureate Sir Arthur

Lewis, who knew the policies were not good. What drove the form the
economic policies took was the fact that Nkrumah needed to use them
to buy political support and sustain his undemocratic regime.

Neither Ghana’s disappointing performance after independence nor
the countless other cases of apparent economic mismanagement can
simply be blamed on ignorance. After all, if ignorance were the
problem, well-meaning leaders would quickly learn what types of
policies increased their citizens’ incomes and welfare, and would
gravitate toward those policies.

Consider the divergent paths of the United States and Mexico.
Blaming this disparity on the ignorance of the leaders of the two
nations is, at best, highly implausible. It wasn’t differences in
knowledge or intentions between John Smith and Cortes that laid the
seeds of divergence during the colonial period, and it wasn’t
differences in knowledge between later U.S. presidents, such as Teddy
Roosevelt or Woodrow Wilson, and Porfirio Diaz that made Mexico
choose economic institutions that enriched elites at the expense of the
rest of society at the end of the nineteenth and beginning of the
twentieth centuries while Roosevelt and Wilson did the opposite.
Rather, it was the differences in the institutional constraints the
countries’ presidents and elites were facing. Similarly, leaders of
African nations that have languished over the last half century under
insecure property rights and economic institutions, impoverishing
much of their populations, did not allow this to happen because they
thought it was good economics; they did so because they could get
away with it and enrich themselves at the expense of the rest, or
because they thought it was good politics, a way of keeping
themselves in power by buying the support of crucial groups or elites.

The experience of Ghana’s prime minister in 1971, Kofi Busia,
illustrates how misleading the ignorance hypothesis can be. Busia
faced a dangerous economic crisis. After coming to power in 1969,
he, like Nkrumah before him, pursued unsustainable expansionary
economic policies and maintained various price controls through
marketing boards and an overvalued exchange rate. Though Busia
had been an opponent of Nkrumah, and led a democratic

government, he faced many of the same political constraints. As with
Nkrumah, his economic policies were adopted not because he was
“ignorant” and believed that these policies were good economics or
an ideal way to develop the country. The policies were chosen
because they were good politics, enabling Busia to transfer resources
to politically powerful groups, for example in urban areas, who
needed to be kept contented. Price controls squeezed agriculture,
delivering cheap food to the urban constituencies and generating
revenues to finance government spending. But these controls were
unsustainable. Ghana was soon suffering from a series of balance-of-
payment crises and foreign exchange shortages. Faced with these
dilemmas, on December 27, 1971, Busia signed an agreement with
the International Monetary Fund that included a massive devaluation
of the currency.

The IMF, the World Bank, and the entire international community
put pressure on Busia to implement the reforms contained in the
agreement. Though the international institutions were blissfully
unaware, Busia knew he was taking a huge political gamble. The
immediate consequence of the currency’s devaluation was rioting and
discontent in Accra, Ghana’s capital, that mounted uncontrollably
until Busia was overthrown by the military, led by Lieutenant Colonel
Acheampong, who immediately reversed the devaluation.

The ignorance hypothesis differs from the geography and culture
hypotheses in that it comes readily with a suggestion about how to
“solve” the problem of poverty: if ignorance got us here, enlightened
and informed rulers and policymakers can get us out and we should
be able to “engineer” prosperity around the world by providing the
right advice and by convincing politicians of what is good economics.
Yet Busia’s experience underscores the fact that the main obstacle to
the adoption of policies that would reduce market failures and
encourage economic growth is not the ignorance of politicians but the
incentives and constraints they face from the political and economic
institutions in their societies.

Although the ignorance hypothesis still rules supreme among most
economists and in Western policymaking circles — which, almost to

the exclusion of anything else, focus on how to engineer prosperity —
it is just another hypothesis that doesn’t work. It explains neither the
origins of prosperity around the world nor the lay of the land around
us — for example, why some nations, such as Mexico and Peru, but not
the United States or England, adopted institutions and policies that
would impoverish the majority of their citizens, or why almost all
sub-Saharan Africa and most of Central America are so much poorer
than Western Europe or East Asia.

When nations break out of institutional patterns condemning them
to poverty and manage to embark on a path to economic growth, this
is not because their ignorant leaders suddenly have become better
informed or less self-interested or because they’ve received advice
from better economists. China, for example, is one of the countries
that made the switch from economic policies that caused poverty and
the starvation of millions to those encouraging economic growth. But,
as we will discuss in greater detail later, this did not happen because
the Chinese Communist Party finally understood that the collective
ownership of agricultural land and industry created terrible economic
incentives. Instead, Deng Xiaoping and his allies, who were no less
self-interested than their rivals but who had different interests and
political objectives, defeated their powerful opponents in the
Communist Party and masterminded a political revolution of sorts,
radically changing the leadership and direction of the party. Their
economic reforms, which created market incentives in agriculture and
then subsequently in industry, followed from this political revolution.
It was politics that determined the switch from communism and
toward market incentives in China, not better advice or a better
understanding of how the economy worked.

We will argue that to understand world inequality we have to
understand why some societies are organized in very inefficient and
socially undesirable ways. Nations sometimes do manage to adopt
efficient institutions and achieve prosperity, but alas, these are the
rare cases. Most economists and policymakers have focused on

“getting it right,” while what is really needed is an explanation for
why poor nations “get it wrong.” Getting it wrong is mostly not about
ignorance or culture. As we will show, poor countries are poor
because those who have power make choices that create poverty.
They get it wrong not by mistake or ignorance but on purpose. To
understand this, you have to go beyond economics and expert advice
on the best thing to do and, instead, study how decisions actually get
made, who gets to make them, and why those people decide to do
what they do. This is the study of politics and political processes.
Traditionally economics has ignored politics, but understanding
politics is crucial for explaining world inequality. As the economist
Abba Lerner noted in the 1970s, “Economics has gained the title
Queen of the Social Sciences by choosing solved political problems as
its domain.”

We will argue that achieving prosperity depends on solving some
basic political problems. It is precisely because economics has
assumed that political problems are solved that it has not been able to
come up with a convincing explanation for world inequality.
Explaining world inequality still needs economics to understand how
different types of policies and social arrangements affect economic
incentives and behavior. But it also needs politics.

3.

THE MAKING OF PROSPERITY AND POVERTY

The Economics of the 38th Parallel

In the summer of 1945, as the Second World War was drawing to a

close, the Japanese colony in Korea began to collapse. Within a
month of Japan’s August 15 unconditional surrender, Korea was
divided at the 38th parallel into two spheres of influence. The South
was administered by the United States. The North, by Russia. The
uneasy peace of the cold war was shattered in June 1950 when the
North Korean army invaded the South. Though initially the North
Koreans made large inroads, capturing the capital city, Seoul, by the
autumn, they were in full retreat. It was then that Hwang Pyong-Won
and his brother were separated. Hwang Pyong-Won managed to hide
and avoid being drafted into the North Korean army. He stayed in the
South and worked as a pharmacist. His brother, a doctor working in
Seoul treating wounded soldiers from the South Korean army, was
taken north as the North Korean army retreated. Dragged apart in
1950, they met again in 2000 in Seoul for the first time in fifty years,
after the two governments finally agreed to initiate a limited program
of family reunification.

As a doctor, Hwang Pyong-Won’s brother had ended up working for
the air force, a good job in a military dictatorship. But even those
with privileges in North Korea don’t do that well. When the brothers
met, Hwang Pyong-Won asked about how life was north of the 38th
parallel. He had a car, but his brother didn’t. “Do you have a
telephone?” he asked his brother. “No,” said his brother. “My
daughter, who works at the Foreign Ministry, has a phone, but if you
don’t know the code you can’t call.” Hwang Pyong-Won recalled how

all the people from the North at the reunion were asking for money,
so he offered some to his brother. But his brother said, “If I go back
with money the government will say, ‘Give that money to us,’ so keep
it.” Hwang Pyong-Won noticed his brother’s coat was threadbare:
“Take off that coat and leave it, and when you go back wear this
one,” he suggested. “I can’t do that,” his brother replied. “This is just
borrowed from the government to come here.” Hwang Pyong-Won
recalled how when they parted, his brother was ill at ease and always
nervous as though someone were listening. He was poorer than
Hwang Pyong-Won imagined. His brother said he lived well, but
Hwang Pyong-Won thought he looked awful and was thin as a rake.

The people of South Korea have living standards similar to those of
Portugal and Spain. To the north, in the so-called Democratic People’s
Republic of Korea, or North Korea, living standards are akin to those
of a sub-Saharan African country, about one-tenth of average living
standards in South Korea. The health of North Koreans is in an even
worse state; the average North Korean can expect to live ten years
less than his cousins south of the 38th parallel. Map 7 illustrates in a
dramatic way the economic gap between the Koreas. It plots data on
the intensity of light at night from satellite images. North Korea is
almost completely dark due to lack of electricity; South Korea is
blazing with light.

These striking differences are not ancient. In fact, they did not exist
prior to the end of the Second World War. But after 1945, the
different governments in the North and the South adopted very
different ways of organizing their economies. South Korea was led,
and its early economic and political institutions were shaped, by the
Harvard- and Princeton-educated, staunchly anticommunist Syngman
Rhee, with significant support from the United States. Rhee was
elected president in 1948. Forged in the midst of the Korean War and
against the threat of communism spreading to the south of the 38th
parallel, South Korea was no democracy. Both Rhee and his equally
famous successor, General Park Chung-Hee, secured their places in
history as authoritarian presidents. But both governed a market
economy where private property was recognized, and after 1961,

Park effectively threw the weight of the state behind rapid economic
growth, channeling credit and subsidies to firms that were successful.

Map 7: Lights in South Korea and darkness in the North

The situation north of the 38th parallel was different. Kim Il-Sung,
a leader of anti-Japanese communist partisans during the Second
World War, established himself as dictator by 1947 and, with the help
of the Soviet Union, introduced a rigid form of centrally planned
economy as part of the so-called Juche system. Private property was

outlawed, and markets were banned. Freedoms were curtailed not
only in the marketplace, but in every sphere of North Koreans’ lives —
except for those who happened to be part of the very small ruling
elite around Kim Il-Sung and, later, his son and successor Kim Jong-Il.

It should not surprise us that the economic fortunes of South and
North Korea diverged sharply. Kim Il-Sung’s command economy and
the Juche system soon proved to be a disaster. Detailed statistics are
not available from North Korea, which is a secretive state, to say the
least. Nonetheless, available evidence confirms what we know from
the all-too-often recurring famines: not only did industrial production
fail to take off, but North Korea in fact experienced a collapse in
agricultural productivity. Lack of private property meant that few
people had incentives to invest or to exert effort to increase or even
maintain productivity. The stifling, repressive regime was inimical to
innovation and the adoption of new technologies. But Kim Il-Sung,
Kim Jong-Il, and their cronies had no intention of reforming the
system, or introducing private property, markets, private contracts, or
changing economic and political institutions. North Korea continues
to stagnate economically.

Meanwhile, in the South, economic institutions encouraged
investment and trade. South Korean politicians invested in education,
achieving high rates of literacy and schooling. South Korean
companies were quick to take advantage of the relatively educated
population, the policies encouraging investment and industrialization,
exports, and the transfer of technology. South Korea quickly became
one of East Asia’s “Miracle Economies,” one of the most rapidly
growing nations in the world.

By the late 1990s, in just about half a century, South Korean
growth and North Korean stagnation led to a tenfold gap between the
two halves of this once-united country — imagine what a difference a
couple of centuries could make. The economic disaster of North
Korea, which led to the starvation of millions, when placed against
the South Korean economic success, is striking: neither culture nor
geography nor ignorance can explain the divergent paths of North
and South Korea. We have to look at institutions for an answer.

Extractive and Inclusive Economic Institutions

Countries differ in their economic success because of their different
institutions, the rules influencing how the economy works, and the
incentives that motivate people. Imagine teenagers in North and
South Korea and what they expect from life. Those in the North grow
up in poverty, without entrepreneurial initiative, creativity, or
adequate education to prepare them for skilled work. Much of the
education they receive at school is pure propaganda, meant to shore
up the legitimacy of the regime; there are few books, let alone
computers. After finishing school, everyone has to go into the army
for ten years. These teenagers know that they will not be able to own
property, start a business, or become more prosperous even if many
people engage illegally in private economic activities to make a
living. They also know that they will not have legal access to markets
where they can use their skills or their earnings to purchase the goods
they need and desire. They are even unsure about what kind of
human rights they will have.

Those in the South obtain a good education, and face incentives
that encourage them to exert effort and excel in their chosen
vocation. South Korea is a market economy, built on private property.
South Korean teenagers know that, if successful as entrepreneurs or
workers, they can one day enjoy the fruits of their investments and
efforts; they can improve their standard of living and buy cars,
houses, and health care.

In the South the state supports economic activity. So it is possible
for entrepreneurs to borrow money from banks and financial markets,
for foreign companies to enter into partnerships with South Korean
firms, for individuals to take up mortgages to buy houses. In the
South, by and large, you are free to open any business you like. In the
North, you are not. In the South, you can hire workers, sell your
products or services, and spend your money in the marketplace in
whichever way you want. In the North, there are only black markets.
These different rules are the institutions under which North and
South Koreans live.

Inclusive economic institutions, such as those in South Korea or in
the United States, are those that allow and encourage participation by
the great mass of people in economic activities that make best use of
their talents and skills and that enable individuals to make the
choices they wish. To be inclusive, economic institutions must feature
secure private property, an unbiased system of law, and a provision of
public services that provides a level playing field in which people can
exchange and contract; it also must permit the entry of new
businesses and allow people to choose their careers.

The contrast of South and North Korea, and of the United States and
Latin America, illustrates a general principle. Inclusive economic
institutions foster economic activity, productivity growth, and
economic prosperity. Secure private property rights are central, since
only those with such rights will be willing to invest and increase
productivity. A businessman who expects his output to be stolen,
expropriated, or entirely taxed away will have little incentive to
work, let alone any incentive to undertake investments and
innovations. But such rights must exist for the majority of people in
society.

In 1680 the English government conducted a census of the
population of its West Indian colony of Barbados. The census revealed
that of the total population on the island of around 60,000, almost
39,000 were African slaves who were the property of the remaining
one-third of the population. Indeed, they were mostly the property of
the largest 175 sugar planters, who also owned most of the land.
These large planters had secure and well-enforced property rights
over their land and even over their slaves. If one planter wanted to
sell slaves to another, he could do so and expect a court to enforce
such a sale or any other contract he wrote. Why? Of the forty judges
and justices of the peace on the island, twenty-nine of them were
large planters. Also, the eight most senior military officials were all
large planters. Despite well-defined, secure, and enforced property
rights and contracts for the island’s elite, Barbados did not have

inclusive economic institutions, since two-thirds of the population
were slaves with no access to education or economic opportunities,
and no ability or incentive to use their talents or skills. Inclusive
economic institutions require secure property rights and economic
opportunities not just for the elite but for a broad cross-section of
society.

Secure property rights, the law, public services, and the freedom to
contract and exchange all rely on the state, the institution with the
coercive capacity to impose order, prevent theft and fraud, and
enforce contracts between private parties. To function well, society
also needs other public services: roads and a transport network so
that goods can be transported; a public infrastructure so that
economic activity can flourish; and some type of basic regulation to
prevent fraud and malfeasance. Though many of these public services
can be provided by markets and private citizens, the degree of
coordination necessary to do so on a large scale often eludes all but a
central authority. The state is thus inexorably intertwined with
economic institutions, as the enforcer of law and order, private
property, and contracts, and often as a key provider of public
services. Inclusive economic institutions need and use the state.

The economic institutions of North Korea or of colonial Latin
America — the mita, encomienda, or repartimiento described earlier — do
not have these properties. Private property is nonexistent in North
Korea. In colonial Latin America there was private property for
Spaniards, but the property of the indigenous peoples was highly
insecure. In neither type of society was the vast mass of people able
to make the economic decisions they wanted to; they were subject to
mass coercion. In neither type of society was the power of the state
used to provide key public services that promoted prosperity. In
North Korea, the state built an education system to inculcate
propaganda, but was unable to prevent famine. In colonial Latin
America, the state focused on coercing indigenous peoples. In neither
type of society was there a level playing field or an unbiased legal
system. In North Korea, the legal system is an arm of the ruling
Communist Party, and in Latin America it was a tool of discrimination

against the mass of people. We call such institutions, which have
opposite properties to those we call inclusive, extractive economic
institutions — extractive because such institutions are designed to
extract incomes and wealth from one subset of society to benefit a
different subset.

Engines of Prosperity

Inclusive economic institutions create inclusive markets, which not
only give people freedom to pursue the vocations in life that best suit
their talents but also provide a level playing field that gives them the
opportunity to do so. Those who have good ideas will be able to start
businesses, workers will tend to go to activities where their
productivity is greater, and less efficient firms can be replaced by
more efficient ones. Contrast how people choose their occupations
under inclusive markets to colonial Peru and Bolivia, where under the
mita, many were forced to work in silver and mercury mines,
regardless of their skills or whether they wanted to. Inclusive markets
are not just free markets. Barbados in the seventeenth century also
had markets. But in the same way that it lacked property rights for all
but the narrow planter elite, its markets were far from inclusive;
markets in slaves were in fact one part of the economic institutions
systematically coercing the majority of the population and robbing
them of the ability to choose their occupations and how they should
utilize their talents.

Inclusive economic institutions also pave the way for two other
engines of prosperity: technology and education. Sustained economic
growth is almost always accompanied by technological improvements
that enable people (labor), land, and existing capital (buildings,
existing machines, and so on) to become more productive. Think of
our great-great-grandparents, just over a century ago, who did not
have access to planes or automobiles or most of the drugs and health
care we now take for granted, not to mention indoor plumbing, air-
conditioning, shopping malls, radio, or motion pictures; let alone
information technology, robotics, or computer-controlled machinery.

And going back a few more generations, the technological know-how
and living standards were even more backward, so much so that we
would find it hard to imagine how most people struggled through life.
These improvements follow from science and from entrepreneurs such
as Thomas Edison, who applied science to create profitable
businesses. This process of innovation is made possible by economic
institutions that encourage private property, uphold contracts, create
a level playing field, and encourage and allow the entry of new
businesses that can bring new technologies to life. It should therefore
be no surprise that it was U.S. society, not Mexico or Peru, that
produced Thomas Edison, and that it was South Korea, not North
Korea, that today produces technologically innovative companies
such as Samsung and Hyundai.

Intimately linked to technology are the education, skills,
competencies, and know-how of the workforce, acquired in schools,
at home, and on the job. We are so much more productive than a
century ago not just because of better technology embodied in
machines but also because of the greater know-how that workers
possess. All the technology in the world would be of little use without
workers who knew how to operate it. But there is more to skills and
competencies than just the ability to run machines. It is the education
and skills of the workforce that generate the scientific knowledge
upon which our progress is built and that enable the adaptation and
adoption of these technologies in diverse lines of business. Though we
saw in chapter 1 that many of the innovators of the Industrial
Revolution and afterward, like Thomas Edison, were not highly
educated, these innovations were much simpler than modern
technology. Today technological change requires education both for
the innovator and the worker. And here we see the importance of
economic institutions that create a level playing field. The United
States could produce, or attract from foreign lands, the likes of Bill
Gates, Steve Jobs, Sergey Brin, Larry Page, and Jeff Bezos, and the
hundreds of scientists who made fundamental discoveries in
information technology, nuclear power, biotech, and other fields
upon which these entrepreneurs built their businesses. The supply of

talent was there to be harnessed because most teenagers in the United
States have access to as much schooling as they wish or are capable of
attaining. Now imagine a different society, for example the Congo or
Haiti, where a large fraction of the population has no means of
attending school, or where, if they manage to go to school, the
quality of teaching is lamentable, where teachers do not show up for
work, and even if they do, there may not be any books.

The low education level of poor countries is caused by economic
institutions that fail to create incentives for parents to educate their
children and by political institutions that fail to induce the
government to build, finance, and support schools and the wishes of
parents and children. The price these nations pay for low education of
their population and lack of inclusive markets is high. They fail to
mobilize their nascent talent. They have many potential Bill Gateses
and perhaps one or two Albert Einsteins who are now working as
poor, uneducated farmers, being coerced to do what they don’t want
to do or being drafted into the army, because they never had the
opportunity to realize their vocation in life.

The ability of economic institutions to harness the potential of
inclusive markets, encourage technological innovation, invest in
people, and mobilize the talents and skills of a large number of
individuals is critical for economic growth. Explaining why so many
economic institutions fail to meet these simple objectives is the
central theme of this book.

Extractive and Inclusive Political Institutions

All economic institutions are created by society. Those of North
Korea, for example, were forced on its citizens by the communists
who took over the country in the 1940s, while those of colonial Latin
America were imposed by Spanish conquistadors. South Korea ended
up with very different economic institutions than the North because
different people with different interests and objectives made the
decisions about how to structure society. In other words, South Korea
had different politics.

Politics is the process by which a society chooses the rules that will
govern it. Politics surrounds institutions for the simple reason that
while inclusive institutions may be good for the economic prosperity
of a nation, some people or groups, such as the elite of the
Communist Party of North Korea or the sugar planters of colonial
Barbados, will be much better off by setting up institutions that are
extractive. When there is conflict over institutions, what happens
depends on which people or group wins out in the game of politics —
who can get more support, obtain additional resources, and form
more effective alliances. In short, who wins depends on the
distribution of political power in society.

The political institutions of a society are a key determinant of the
outcome of this game. They are the rules that govern incentives in
politics. They determine how the government is chosen and which
part of the government has the right to do what. Political institutions
determine who has power in society and to what ends that power can
be used. If the distribution of power is narrow and unconstrained,
then the political institutions are absolutist, as exemplified by the
absolutist monarchies reigning throughout the world during much of
history. Under absolutist political institutions such as those in North
Korea and colonial Latin America, those who can wield this power
will be able to set up economic institutions to enrich themselves and
augment their power at the expense of society. In contrast, political
institutions that distribute power broadly in society and subject it to
constraints are pluralistic. Instead of being vested in a single
individual or a narrow group, political power rests with a broad
coalition or a plurality of groups.

There is obviously a close connection between pluralism and
inclusive economic institutions. But the key to understanding why
South Korea and the United States have inclusive economic
institutions is not just their pluralistic political institutions but also
their sufficiently centralized and powerful states. A telling contrast is
with the East African nation of Somalia. As we will see later in the
book, political power in Somalia has long been widely distributed —
almost pluralistic. Indeed there is no real authority that can control or

sanction what anyone does. Society is divided into deeply
antagonistic clans that cannot dominate one another. The power of
one clan is constrained only by the guns of another. This distribution
of power leads not to inclusive institutions but to chaos, and at the
root of it is the Somali state’s lack of any kind of political
centralization, or state centralization, and its inability to enforce even
the minimal amount of law and order to support economic activity,
trade, or even the basic security of its citizens.

Max Weber, who we met in the previous chapter, provided the
most famous and widely accepted definition of the state, identifying it
with the “monopoly of legitimate violence” in society. Without such a
monopoly and the degree of centralization that it entails, the state
cannot play its role as enforcer of law and order, let alone provide
public services and encourage and regulate economic activity. When
the state fails to achieve almost any political centralization, society
sooner or later descends into chaos, as did Somalia.

We will refer to political institutions that are sufficiently
centralized and pluralistic as inclusive political institutions. When
either of these conditions fails, we will refer to the institutions as
extractive political institutions.

There is strong synergy between economic and political
institutions. Extractive political institutions concentrate power in the
hands of a narrow elite and place few constraints on the exercise of
this power. Economic institutions are then often structured by this
elite to extract resources from the rest of the society. Extractive
economic institutions thus naturally accompany extractive political
institutions. In fact, they must inherently depend on extractive
political institutions for their survival. Inclusive political institutions,
vesting power broadly, would tend to uproot economic institutions
that expropriate the resources of the many, erect entry barriers, and
suppress the functioning of markets so that only a few benefit.

In Barbados, for example, the plantation system based on the
exploitation of slaves could not have survived without political
institutions that suppressed and completely excluded the slaves from
the political process. The economic system impoverishing millions for

the benefit of a narrow communist elite in North Korea would also be
unthinkable without the total political domination of the Communist
Party.

This synergistic relationship between extractive economic and
political institutions introduces a strong feedback loop: political
institutions enable the elites controlling political power to choose
economic institutions with few constraints or opposing forces. They
also enable the elites to structure future political institutions and their
evolution. Extractive economic institutions, in turn, enrich the same
elites, and their economic wealth and power help consolidate their
political dominance. In Barbados or in Latin America, for example,
the colonists were able to use their political power to impose a set of
economic institutions that made them huge fortunes at the expense of
the rest of the population. The resources these economic institutions
generated enabled these elites to build armies and security forces to
defend their absolutist monopoly of political power. The implication
of course is that extractive political and economic institutions support
each other and tend to persist.

There is in fact more to the synergy between extractive economic
and political institutions. When existing elites are challenged under
extractive political institutions and the newcomers break through, the
newcomers are likewise subject to only a few constraints. They thus
have incentives to maintain these political institutions and create a
similar set of economic institutions, as Porfirio Diaz and the elite
surrounding him did at the end of the nineteenth century in Mexico.

Inclusive economic institutions, in turn, are forged on foundations
laid by inclusive political institutions, which make power broadly
distributed in society and constrain its arbitrary exercise. Such
political institutions also make it harder for others to usurp power
and undermine the foundations of inclusive institutions. Those
controlling political power cannot easily use it to set up extractive
economic institutions for their own benefit. Inclusive economic
institutions, in turn, create a more equitable distribution of resources,
facilitating the persistence of inclusive political institutions.

It was not a coincidence that when, in 1618, the Virginia Company

gave land, and freedom from their draconian contracts, to the
colonists it had previously tried to coerce, the General Assembly in
the following year allowed the colonists to begin governing
themselves. Economic rights without political rights would not have
been trusted by the colonists, who had seen the persistent efforts of
the Virginia Company to coerce them. Neither would these economies
have been stable and durable. In fact, combinations of extractive and
inclusive institutions are generally unstable. Extractive economic
institutions under inclusive political institutions are unlikely to
survive for long, as our discussion of Barbados suggests.

Similarly, inclusive economic institutions will neither support nor
be supported by extractive political ones. Either they will be
transformed into extractive economic institutions to the benefit of the
narrow interests that hold power, or the economic dynamism they
create will destabilize the extractive political institutions, opening the
way for the emergence of inclusive political institutions. Inclusive
economic institutions also tend to reduce the benefits the elites can
enjoy by ruling over extractive political institutions, since those
institutions face competition in the marketplace and are constrained
by the contracts and property rights of the rest of society.

Why Not Always Choose Prosperity?

Political and economic institutions, which are ultimately the choice of
society, can be inclusive and encourage economic growth. Or they
can be extractive and become impediments to economic growth.
Nations fail when they have extractive economic institutions,
supported by extractive political institutions that impede and even
block economic growth. But this means that the choice of institutions
— that is, the politics of institutions — is central to our quest for
understanding the reasons for the success and failure of nations. We
have to understand why the politics of some societies lead to
inclusive institutions that foster economic growth, while the politics
of the vast majority of societies throughout history has led, and still
leads today, to extractive institutions that hamper economic growth.

It might seem obvious that everyone should have an interest in
creating the type of economic institutions that will bring prosperity.
Wouldn’t every citizen, every politician, and even a predatory
dictator want to make his country as wealthy as possible?

Let’s return to the Kingdom of Kongo we discussed earlier. Though
this kingdom collapsed in the seventeenth century, it provided the
name for the modern country that became independent from Belgian
colonial rule in 1960. As an independent polity, Congo experienced
almost unbroken economic decline and mounting poverty under the
rule of Joseph Mobutu between 1965 and 1997. This decline
continued after Mobutu was overthrown by Laurent Kabila. Mobutu
created a highly extractive set of economic institutions. The citizens
were impoverished, but Mobutu and the elite surrounding him,
known as Les Grosses Legumes (the Big Vegetables), became
fabulously wealthy. Mobutu built himself a palace at his birthplace,
Gbadolite, in the north of the country, with an airport large enough
to land a supersonic Concord jet, a plane he frequently rented from
Air France for travel to Europe. In Europe he bought castles and
owned large tracts of the Belgian capital of Brussels.

Wouldn’t it have been better for Mobutu to set up economic
institutions that increased the wealth of the Congolese rather than
deepening their poverty? If Mobutu had managed to increase the
prosperity of his nation, would he not have been able to appropriate
even more money, buy a Concord instead of renting one, have more
castles and mansions, possibly a bigger and more powerful army?
Unfortunately for the citizens of many countries in the world, the
answer is no. Economic institutions that create incentives for
economic progress may simultaneously redistribute income and
power in such a way that a predatory dictator and others with
political power may become worse off.

The fundamental problem is that there will necessarily be disputes
and conflict over economic institutions. Different institutions have
different consequences for the prosperity of a nation, how that
prosperity is distributed, and who has power. The economic growth
which can be induced by institutions creates both winners and losers.

This was clear during the Industrial Revolution in England, which laid
the foundations of the prosperity we see in the rich countries of the
world today. It centered on a series of pathbreaking technological
changes in steam power, transportation, and textile production. Even
though mechanization led to enormous increases in total incomes and
ultimately became the foundation of modern industrial society, it was
bitterly opposed by many. Not because of ignorance or
shortsightedness; quite the opposite. Rather, such opposition to
economic growth has its own, unfortunately coherent, logic.
Economic growth and technological change are accompanied by what
the great economist Joseph Schumpeter called creative destruction.
They replace the old with the new. New sectors attract resources
away from old ones. New firms take business away from established
ones. New technologies make existing skills and machines obsolete.
The process of economic growth and the inclusive institutions upon
which it is based create losers as well as winners in the political arena
and in the economic marketplace. Fear of creative destruction is often
at the root of the opposition to inclusive economic and political
institutions.

European history provides a vivid example of the consequences of
creative destruction. On the eve of the Industrial Revolution in the
eighteenth century, the governments of most European countries were
controlled by aristocracies and traditional elites, whose major source
of income was from landholdings or from trading privileges they
enjoyed thanks to monopolies granted and entry barriers imposed by
monarchs. Consistent with the idea of creative destruction, the spread
of industries, factories, and towns took resources away from the land,
reduced land rents, and increased the wages that landowners had to
pay their workers. These elites also saw the emergence of new
businessmen and merchants eroding their trading privileges. All in all,
they were the clear economic losers from industrialization.
Urbanization and the emergence of a socially conscious middle and
working class also challenged the political monopoly of landed
aristocracies. So with the spread of the Industrial Revolution the
aristocracies weren’t just the economic losers; they also risked

becoming political losers, losing their hold on political power. With
their economic and political power under threat, these elites often
formed a formidable opposition against industrialization.

The aristocracy was not the only loser from industrialization.
Artisans whose manual skills were being replaced by mechanization
likewise opposed the spread of industry. Many organized against it,
rioting and destroying the machines they saw as responsible for the
decline of their livelihood. They were the Luddites, a word that has
today become synonymous with resistance to technological change.
John Kay, English inventor of the “flying shuttle” in 1733, one of the
first significant improvements in the mechanization of weaving, had
his house burned down by Luddites in 1753. James Hargreaves,
inventor of the “spinning jenny,” a complementary revolutionary
improvement in spinning, got similar treatment.

In reality, the artisans were much less effective than the
landowners and elites in opposing industrialization. The Luddites did
not possess the political power — the ability to affect political
outcomes against the wishes of other groups — of the landed
aristocracy. In England, industrialization marched on, despite the
Luddites’ opposition, because aristocratic opposition, though real, was
muted. In the Austro-Hungarian and the Russian empires, where the
absolutist monarchs and aristocrats had far more to lose,
industrialization was blocked. In consequence, the economies of
Austria-Hungary and Russia stalled. They fell behind other European
nations, where economic growth took off during the nineteenth
century.

The success and failure of specific groups notwithstanding, one
lesson is clear: powerful groups often stand against economic progress
and against the engines of prosperity. Economic growth is not just a
process of more and better machines, and more and better educated
people, but also a transformative and destabilizing process associated
with widespread creative destruction. Growth thus moves forward
only if not blocked by the economic losers who anticipate that their
economic privileges will be lost and by the political losers who fear
that their political power will be eroded.

Conflict over scarce resources, income and power, translates into
conflict over the rules of the game, the economic institutions, which
will determine the economic activities and who will benefit from
them. When there is a conflict, the wishes of all parties cannot be
simultaneously met. Some will be defeated and frustrated, while
others will succeed in securing outcomes they like. Who the winners
of this conflict are has fundamental implications for a nation’s
economic trajectory. If the groups standing against growth are the
winners, they can successfully block economic growth, and the
economy will stagnate.

The logic of why the powerful would not necessarily want to set up
the economic institutions that promote economic success extends
easily to the choice of political institutions. In an absolutist regime,
some elites can wield power to set up economic institutions they
prefer. Would they be interested in changing political institutions to
make them more pluralistic? In general not, since this would only
dilute their political power, making it more difficult, maybe
impossible, for them to structure economic institutions to further
their own interests. Here again we see a ready source of conflict. The
people who suffer from the extractive economic institutions cannot
hope for absolutist rulers to voluntarily change political institutions
and redistribute power in society. The only way to change these
political institutions is to force the elite to create more pluralistic
institutions.

In the same way that there is no reason why political institutions
should automatically become pluralistic, there is no natural tendency
toward political centralization. There would certainly be incentives to
create more centralized state institutions in any society, particularly
in those with no such centralization whatsoever. For example, in
Somalia, if one clan created a centralized state capable of imposing
order on the country, this could lead to economic benefits and make
this clan richer. What stops this? The main barrier to political
centralization is again a form of fear from change: any clan, group, or
politician attempting to centralize power in the state will also be
centralizing power in their own hands, and this is likely to meet the

ire of other clans, groups, and individuals, who would be the political
losers of this process. Lack of political centralization means not only
lack of law and order in much of a territory but also there being many
actors with sufficient powers to block or disrupt things, and the fear
of their opposition and violent reaction will often deter many would-
be centralizers. Political centralization is likely only when one group
of people is sufficiently more powerful than others to build a state. In
Somalia, power is evenly balanced, and no one clan can impose its
will on any other. Therefore, the lack of political centralization
persists.

The Long Agony of the Congo

There are few better, or more depressing, examples of the forces that
explain the logic of why economic prosperity is so persistently rare
under extractive institutions or that illustrate the synergy between
extractive economic and political institutions than the Congo.
Portuguese and Dutch visitors to Kongo in the fifteenth and sixteenth
centuries remarked on the “miserable poverty” there. Technology was
rudimentary by European standards, with the Kongolese having
neither writing, the wheel, nor the plow. The reason for this poverty,
and the reluctance of Kongolese farmers to adopt better technologies
when they learned of them, is clear from existing historical accounts.
It was due to the extractive nature of the country’s economic
institutions.

As we have seen, the Kingdom of Kongo was governed by the king
in Mbanza, subsequently Sao Salvador. Areas away from the capital
were ruled by an elite who played the roles of governors of different
parts of the kingdom. The wealth of this elite was based on slave
plantations around Sao Salvador and the extraction of taxes from the
rest of the country. Slavery was central to the economy, used by the
elite to supply their own plantations and by Europeans on the coast.
Taxes were arbitrary; one tax was even collected every time the king’s
beret fell off. To become more prosperous, the Kongolese people
would have had to save and invest — for example, by buying plows.

But it would not have been worthwhile, since any extra output that
they produced using better technology would have been subject to
expropriation by the king and his elite. Instead of investing to
increase their productivity and selling their products in markets, the
Kongolese moved their villages away from the market; they were
trying to be as far away from the roads as possible, in order to reduce
the incidence of plunder and to escape the reach of slave traders.

The poverty of the Kongo was therefore the result of extractive
economic institutions that blocked all the engines of prosperity or
even made them work in reverse. The Kongo’s government provided
very few public services to its citizens, not even basic ones, such as
secure property rights or law and order. On the contrary, the
government was itself the biggest threat to its subjects’ property and
human rights. The institution of slavery meant that the most
fundamental market of all, an inclusive labor market where people
can choose their occupation or jobs in ways that are so crucial for a
prosperous economy, did not exist. Moreover, long-distance trade and
mercantile activities were controlled by the king and were open only
to those associated with him. Though the elite quickly became literate
after the Portuguese introduced writing, the king made no attempt to
spread literacy to the great mass of the population.

Nevertheless, though “miserable poverty” was widespread, the
Kongolese extractive institutions had their own impeccable logic: they
made a few people, those with political power, very rich. In the
sixteenth century, the king of Kongo and the aristocracy were able to
import European luxury goods and were surrounded by servants and
slaves.

The roots of the economic institutions of Kongolese society flowed
from the distribution of political power in society and thus from the
nature of political institutions. There was nothing to stop the king
from taking people’s possessions or bodies, other than the threat of
revolt. Though this threat was real, it was not enough to make people
or their wealth secure. The political institutions of Kongo were truly
absolutist, making the king and the elite subject to essentially no
constraints, and it gave no say to the citizens in the way their society

was organized.

Of course, it is not difficult to see that the political institutions of
Kongo contrast sharply with inclusive political institutions where
power is constrained and broadly distributed. The absolutist
institutions of Kongo were kept in place by the army. The king had a
standing army of five thousand troops in the mid-seventeenth
century, with a core of five hundred musketeers — a formidable force
for its time. Why the king and the aristocracy so eagerly adopted
European firearms is thus easy to understand.

There was no chance of sustained economic growth under this set
of economic institutions and even incentives for generating temporary
growth were highly limited. Reforming economic institutions to
improve individual property rights would have made the Kongolese
society at large more prosperous. But it is unlikely that the elite
would have benefited from this wider prosperity. First, such reforms
would have made the elite economic losers, by undermining the
wealth that the slave trade and slave plantations brought them.
Second, such reforms would have been possible only if the political
power of the king and the elite were curtailed. For instance, if the
king continued to command his five hundred musketeers, who would
have believed an announcement that slavery had been abolished?
What would have stopped the king from changing his mind later on?
The only real guarantee would have been a change in political
institutions so that citizens gained some countervailing political
power, giving them some say over taxation or what the musketeers
did. But in this case it is dubious that sustaining the consumption and
lifestyle of the king and the elite would have been high on their list of
priorities. In this scenario, changes that would have created better
economic institutions in society would have made the king and
aristocracy political as well as economic losers.

The interaction of economic and political institutions five hundred
years ago is still relevant for understanding why the modern state of
Congo is still miserably poor today. The advent of European rule in
this area, and deeper into the basin of the River Congo at the time of
the “scramble for Africa” in the late nineteenth century, led to an

insecurity of human and property rights even more egregious than
that which characterized the precolonial Kongo. In addition, it
reproduced the pattern of extractive institutions and political
absolutism that empowered and enriched a few at the expense of the
masses, though the few now were Belgian colonialists, most notably
King Leopold II.

When Congo became independent in 1960, the same pattern of
economic institutions, incentives, and performance reproduced itself.
These Congolese extractive economic institutions were again
supported by highly extractive political institutions. The situation was
worsened because European colonialism created a polity, Congo,
made up of many different precolonial states and societies that the
national state, run from Kinshasa, had little control over. Though
President Mobutu used the state to enrich himself and his cronies —
for example, through the Zairianization program of 1973, which
involved the mass expropriation of foreign economic interests — he
presided over a noncentralized state with little authority over much
of the country, and had to appeal to foreign assistance to stop the
provinces of Katanga and Kasai from seceding in the 1960s. This lack
of political centralization, almost to the point of total collapse of the
state, is a feature that Congo shares with much of sub-Saharan Africa.

The modern Democratic Republic of Congo remains poor because
its citizens still lack the economic institutions that create the basic
incentives that make a society prosperous. It is not geography,
culture, or the ignorance of its citizens or politicians that keep the
Congo poor, but its extractive economic institutions. These are still in
place after all these centuries because political power continues to be
narrowly concentrated in the hands of an elite who have little
incentive to enforce secure property rights for the people, to provide
the basic public services that would improve the quality of life, or to
encourage economic progress. Rather, their interests are to extract
income and sustain their power. They have not used this power to
build a centralized state, for to do so would create the same problems
of opposition and political challenges that promoting economic
growth would. Moreover, as in much of the rest of sub-Saharan

Africa, infighting triggered by rival groups attempting to take control
of extractive institutions destroyed any tendency for state
centralization that might have existed.

The history of the Kingdom of Kongo, and the more recent history
of the Congo, vividly illustrates how political institutions determine
economic institutions and, through these, the economic incentives
and the scope for economic growth. It also illustrates the symbiotic
relationship between political absolutism and economic institutions
that empower and enrich a few at the expense of many.

Growth Under Extractive Political Institutions

Congo today is an extreme example, with lawlessness and highly
insecure property rights. However, in most cases such extremism
would not serve the interest of the elite, since it would destroy all
economic incentives and generate few resources to be extracted. The
central thesis of this book is that economic growth and prosperity are
associated with inclusive economic and political institutions, while
extractive institutions typically lead to stagnation and poverty. But
this implies neither that extractive institutions can never generate
growth nor that all extractive institutions are created equal.

There are two distinct but complementary ways in which growth
under extractive political institutions can emerge. First, even if
economic institutions are extractive, growth is possible when elites
can directly allocate resources to high-productivity activities that they
themselves control. A prominent example of this type of growth
under extractive institutions was the Caribbean Islands between the
sixteenth and eighteenth centuries. Most people were slaves, working
under gruesome conditions in plantations, living barely above
subsistence level. Many died from malnutrition and exhaustion. In
Barbados, Cuba, Haiti, and Jamaica in the seventeenth and eighteenth
centuries, a small minority, the planter elite, controlled all political
power and owned all the assets, including all the slaves. While the
majority had no rights, the planter elite’s property and assets were
well protected. Despite the extractive economic institutions that

savagely exploited the majority of the population, these islands were
among the richest places in the world, because they could produce
sugar and sell it in world markets. The economy of the islands
stagnated only when there was a need to shift to new economic
activities, which threatened both the incomes and the political power
of the planter elite.

Another example is the economic growth and industrialization of
the Soviet Union from the first Five-Year Plan in 1928 until the
1970s. Political and economic institutions were highly extractive, and
markets were heavily constrained. Nevertheless, the Soviet Union was
able to achieve rapid economic growth because it could use the
power of the state to move resources from agriculture, where they
were very inefficiently used, into industry.

The second type of growth under extractive political institutions
arises when the institutions permit the development of somewhat,
even if not completely, inclusive economic institutions. Many
societies with extractive political institutions will shy away from
inclusive economic institutions because of fear of creative destruction.
But the degree to which the elite manage to monopolize power varies
across societies. In some, the position of the elite could be sufficiently
secure that they may permit some moves toward inclusive economic
institutions when they are fairly certain that this will not threaten
their political power. Alternatively, the historical situation could be
such as to endow an extractive political regime with rather inclusive
economic institutions, which they decide not to block. These provide
the second way in which growth can take place under extractive
political institutions.

The rapid industrialization of South Korea under General Park is an
example. Park came to power via a military coup in 1961, but he did
so in a society heavily supported by the United States and with an
economy where economic institutions were essentially inclusive.
Though Park’s regime was authoritarian, it felt secure enough to
promote economic growth, and in fact did so very actively — perhaps
partly because the regime was not directly supported by extractive
economic institutions. Differently from the Soviet Union and most

other cases of growth under extractive institutions, South Korea
transitioned from extractive political institutions toward inclusive
political institutions in the 1980s. This successful transition was due
to a confluence of factors.

By the 1970s, economic institutions in South Korea had become
sufficiently inclusive that they reduced one of the strong rationales
for extractive political institutions — the economic elite had little to
gain from their own or the military’s dominance of politics. The
relative equality of income in South Korea also meant that the elite
had less to fear from pluralism and democracy. The key influence of
the United States, particularly given the threat from North Korea, also
meant that the strong democracy movement that challenged the
military dictatorship could not be repressed for long. Though General
Park’s assassination in 1979 was followed by another military coup,
led by Chun Doo-hwan, Chun’s chosen successor, Roh Tae-woo,
initiated a process of political reforms that led to the consolidation of
a pluralistic democracy after 1992. Of course, no transition of this
sort took place in the Soviet Union. In consequence, Soviet growth
ran out of steam, and the economy began to collapse in the 1980s and
then totally fell apart in the 1990s.

Chinese economic growth today also has several commonalities
with both the Soviet and South Korean experiences. While the early
stages of Chinese growth were spearheaded by radical market reforms
in the agricultural sector, reforms in the industrial sector have been
more muted. Even today, the state and the Communist Party play a
central role in deciding which sectors and which companies will
receive additional capital and will expand — in the process, making
and breaking fortunes. As in the Soviet Union in its heyday, China is
growing rapidly, but this is still growth under extractive institutions,
under the control of the state, with little sign of a transition to
inclusive political institutions. The fact that Chinese economic
institutions are still far from fully inclusive also suggests that a South
Korean-style transition is less likely, though of course not impossible.

It is worth noting that political centralization is key to both ways in
which growth under extractive political institutions can occur.

Without some degree of political centralization, the planter elite in
Barbados, Cuba, Haiti, and Jamaica would not have been able to keep
law and order and defend their own assets and property. Without
significant political centralization and a firm grip on political power,
neither the South Korean military elites nor the Chinese Communist
Party would have felt secure enough to manufacture significant
economic reforms and still manage to cling to power. And without
such centralization, the state in the Soviet Union or China could not
have been able to coordinate economic activity to channel resources
toward high productivity areas. A major dividing line between
extractive political institutions is therefore their degree of political
centralization. Those without it, such as many in sub-Saharan Africa,
will find it difficult to achieve even limited growth.

Even though extractive institutions can generate some growth, they
will usually not generate sustained economic growth, and certainly
not the type of growth that is accompanied by creative destruction.
When both political and economic institutions are extractive, the
incentives will not be there for creative destruction and technological
change. For a while the state may be able to create rapid economic
growth by allocating resources and people by fiat, but this process is
intrinsically limited. When the limits are hit, growth stops, as it did in
the Soviet Union in the 1970s. Even when the Soviets achieved rapid
economic growth, there was little technological change in most of the
economy, though by pouring massive resources into the military they
were able to develop military technologies and even pull ahead of the
United States in the space and nuclear race for a short while. But this
growth without creative destruction and without broad-based
technological innovation was not sustainable and came to an abrupt
end.

In addition, the arrangements that support economic growth under
extractive political institutions are, by their nature, fragile — they can
collapse or can be easily destroyed by the infighting that the
extractive institutions themselves generate. In fact, extractive political
and economic institutions create a general tendency for infighting,
because they lead to the concentration of wealth and power in the

hands of a narrow elite. If another group can overwhelm and
outmaneuver this elite and take control of the state, they will be the
ones enjoying this wealth and power. Consequently, as our discussion
of the collapse of the later Roman Empire and the Maya cities will
illustrate (this page and this page), fighting to control the all-powerful
state is always latent, and it will periodically intensify and bring the
undoing of these regimes, as it turns into civil war and sometimes
into total breakdown and collapse of the state. One implication of this
is that even if a society under extractive institutions initially achieves
some degree of state centralization, it will not last. In fact, the
infighting to take control of extractive institutions often leads to civil
wars and widespread lawlessness, enshrining a persistent absence of
state centralization as in many nations in sub-Saharan Africa and
some in Latin America and South Asia.

Finally, when growth comes under extractive political institutions
but where economic institutions have inclusive aspects, as they did in
South Korea, there is always the danger that economic institutions
become more extractive and growth stops. Those controlling political
power will eventually find it more beneficial to use their power to
limit competition, to increase their share of the pie, or even to steal
and loot from others rather than support economic progress. The
distribution and ability to exercise power will ultimately undermine
the very foundations of economic prosperity, unless political
institutions are transformed from extractive to inclusive.

4 .

SMALL DIFFERENCES AND CRITICAL JUNCTURES: THE WEIGHT

OF HISTORY

The World the Plague Created

In 1346 the bubonic plague, the Black Death, reached the port city of

Tana at the mouth of the River Don on the Black Sea. Transmitted by
fleas living on rats, the plague was brought from China by traders
traveling along the Silk Road, the great trans-Asian commercial
artery. Thanks to Genoese traders, the rats were soon spreading the
fleas and the plague from Tana to the entire Mediterranean. By early
1347, the plague had reached Constantinople. In the spring of 1348,
it was spreading through France and North Africa and up the boot of
Italy. The plague wiped out about half of the population of any area it
hit. Its arrival in the Italian city of Florence was witnessed firsthand
by the Italian writer Giovanni Boccaccio. He later recalled:

In the face of its onrush, all the wisdom and ingenuity of
man were unavailing ... the plague began, in a terrifying
and extraordinary manner, to make its disastrous effects
apparent. It did not take the form it had assumed in the
East, where if anyone bled from the nose it was an obvious
portent of certain death. On the contrary, its earliest
symptom was the appearance of certain swellings in the
groin or armpit, some of which were egg-shaped whilst
others were roughly the size of a common apple ... Later
on the symptoms of the disease changed, and many people
began to find dark blotches and bruises on their arms,
thighs and other parts of their bodies ... Against these

maladies ... All the advice of physicians and all the power
of medicine were profitless and unavailing . . . And in most
cases death occurred within three days from the
appearance of the symptoms we have described.

People in England knew the plague was coming their way and were
well aware of impending doom. In mid- August 1348, King Edward III
asked the Archbishop of Canterbury to organize prayers, and many
bishops wrote letters for priests to read out in church to help people
cope with what was about to hit them. Ralph of Shrewsbury, Bishop
of Bath, wrote to his priests:

Almighty God uses thunder, lightening [sic], and other
blows which issue from his throne to scourge the sons
whom he wishes to redeem. Accordingly, since a
catastrophic pestilence from the East has arrived in a
neighboring kingdom, it is to be very much feared that,
unless we pray devoutly and incessantly, a similar
pestilence will stretch its poisonous branches into this
realm, and strike down and consume the inhabitants.
Therefore we must all come before the presence of the
Lord in confession, reciting psalms.

It didn’t do any good. The plague hit and quickly wiped out about
half the English population. Such catastrophes can have a huge effect
on the institutions of society. Perhaps understandably, scores of
people went mad. Boccaccio noted that “some maintained that an
infallible way of warding off this appalling evil was to drink heavily,
enjoy life to the full, go round singing and merrymaking, gratify all
one’s cravings whenever the opportunity offered, and shrug the thing
off as an enormous joke ... and this explains why those women who
recovered were possibly less chaste in the period that followed.” Yet
the plague also had a socially, economically, and politically
transformative impact on medieval European societies.

At the turn of the fourteenth century, Europe had a feudal order, an
organization of society that first emerged in Western Europe after the

collapse of the Roman Empire. It was based on a hierarchical
relationship between the king and the lords beneath him, with the
peasants at the bottom. The king owned the land and he granted it to
the lords in exchange for military services. The lords then allocated
land to peasants, in exchange for which peasants had to perform
extensive unpaid labor and were subject to many fines and taxes.
Peasants, who because of their “servile” status were thus called serfs,
were tied to the land, unable to move elsewhere without the
permission of their lord, who was not just the landlord, but also the
judge, jury, and police force. It was a highly extractive system, with
wealth flowing upward from the many peasants to the few lords.

The massive scarcity of labor created by the plague shook the
foundations of the feudal order. It encouraged peasants to demand
that things change. At Eynsham Abbey, for example, the peasants
demanded that many of the fines and unpaid labor be reduced. They
got what they wanted, and their new contract began with the
assertion “At the time of the mortality or pestilence, which occurred
in 1349, scarcely two tenants remained in the manor, and they
expressed their intention of leaving unless Brother Nicholas of Upton,
then abbot and lord of the manor, made a new agreement with
them.” He did.

What happened at Eynsham happened everywhere. Peasants started
to free themselves from compulsory labor services and many
obligations to their lords. Wages started to rise. The government tried
to put a stop to this and, in 1351, passed the Statute of Laborers,
which commenced:

Because a great part of the people and especially of the
workmen and servants has now died in that pestilence,
some, seeing the straights of the masters and the scarcity
of servants, are not willing to serve unless they receive
excessive wages ... We, considering the grave
inconveniences which might come from the lack especially
of ploughmen and such labourers, have ... seen fit to
ordain: that every man and woman of our kingdom of

England . . . shall be bound to serve him who has seen fit so
to seek after him; and he shall take only the wages
liveries, meed or salary which, in the places where he
sought to serve, were accustomed to be paid in the
twentieth year of our reign of England [King Edward III
came to the throne on January 25, 1327, so the reference
here is to 1347] or the five or six common years next
preceding.

The statute in effect tried to fix wages at the levels paid before the
Black Death. Particularly concerning for the English elite was
“enticement,” the attempt by one lord to attract the scarce peasants of
another. The solution was to make prison the punishment for leaving
employment without permission of the employer:

And if a reaper or mower, or other workman or servant, of
whatever standing or condition he be, who is retained in
the service of any one, do depart from the said service
before the end of the term agreed, without permission or
reasonable cause, he shall undergo the penalty of
imprisonment, and let no one ... moreover, pay or permit
to be paid to any one more wages, livery, meed or salary
than was customary as has been said.

The attempt by the English state to stop the changes of institutions
and wages that came in the wake of the Black Death didn’t work. In
1381 the Peasants’ Revolt broke out, and the rebels, under the
leadership of Wat Tyler, even captured most of London. Though they
were ultimately defeated, and Tyler was executed, there were no
more attempts to enforce the Statute of Laborers. Feudal labor
services dwindled away, an inclusive labor market began to emerge in
England, and wages rose.

The plague seems to have hit most of the world, and everywhere a
similar fraction of the population perished. Thus the demographic
impact in Eastern Europe was the same as in England and Western
Europe. The social and economic forces at play were also the same.

Labor was scarce and people demanded greater freedoms. But in the
East, a more powerful contradictory logic was at work. Fewer people
meant higher wages in an inclusive labor market. But this gave lords
a greater incentive to keep the labor market extractive and the
peasants servile. In England this motivation had been in play, too, as
reflected in the Statute of Laborers. But workers had sufficient power
that they got their way. Not so in Eastern Europe. After the plague,
Eastern landlords started to take over large tracts of land and expand
their holdings, which were already larger than those in Western
Europe. Towns were weaker and less populous, and rather than
becoming freer, workers began to see their already existing freedoms
encroached on.

The effects became especially clear after 1500, when Western
Europe began to demand the agricultural goods, such as wheat, rye,
and livestock, produced in the East. Eighty percent of the imports of
rye into Amsterdam came from the Elbe, Vistula, and Oder river
valleys. Soon half of the Netherlands’ booming trade was with Eastern
Europe. As Western demand expanded, Eastern landlords ratcheted up
their control over the labor force to expand their supply. It was to be
called the Second Serfdom, distinct and more intense than its original
form of the early Middle Ages. Lords increased the taxes they levied
on their tenants’ own plots and took half of the gross output. In
Korczyn, Poland, all work for the lord in 1533 was paid. But by 1600
nearly half was unpaid forced labor. In 1500, workers in
Mecklenberg, in eastern Germany, owed only a few days’ unpaid
labor services a year. By 1550 it was one day a week, and by 1600,
three days per week. Workers’ children had to work for the lord for
free for several years. In Hungary, landlords took complete control of
the land in 1514, legislating one day a week of unpaid labor services
for each worker. In 1550 this was raised to two days per week. By the
end of the century, it was three days. Serfs subject to these rules made
up 90 percent of the rural population by this time.

Though in 1346 there were few differences between Western and
Eastern Europe in terms of political and economic institutions, by
1600 they were worlds apart. In the West, workers were free of feudal

dues, fines, and regulations and were becoming a key part of a
booming market economy. In the East, they were also involved in
such an economy, but as coerced serfs growing the food and
agricultural goods demanded in the West. It was a market economy,
but not an inclusive one. This institutional divergence was the result
of a situation where the differences between these areas initially
seemed very small: in the East, lords were a little better organized;
they had slightly more rights and more consolidated landholdings.
Towns were weaker and smaller, peasants less organized. In the grand
scheme of history, these were small differences. Yet these small
differences between the East and the West became very consequential
for the lives of their populations and for the future path of
institutional development when the feudal order was shaken up by
the Black Death.

The Black Death is a vivid example of a critical juncture, a major
event or confluence of factors disrupting the existing economic or
political balance in society. A critical juncture is a double-edged
sword that can cause a sharp turn in the trajectory of a nation. On the
one hand it can open the way for breaking the cycle of extractive
institutions and enable more inclusive ones to emerge, as in England.
Or it can intensify the emergence of extractive institutions, as was the
case with the Second Serfdom in Eastern Europe.

Understanding how history and critical junctures shape the path of
economic and political institutions enables us to have a more
complete theory of the origins of differences in poverty and
prosperity. In addition, it enables us to account for the lay of the land
today and why some nations make the transition to inclusive
economic and political institutions while others do not.

The Making of Inclusive Institutions

England was unique among nations when it made the breakthrough
to sustained economic growth in the seventeenth century. Major
economic changes were preceded by a political revolution that
brought a distinct set of economic and political institutions, much

more inclusive than those of any previous society. These institutions
would have profound implications not only for economic incentives
and prosperity, but also for who would reap the benefits of
prosperity. They were based not on consensus but, rather, were the
result of intense conflict as different groups competed for power,
contesting the authority of others and attempting to structure
institutions in their own favor. The culmination of the institutional
struggles of the sixteenth and seventeenth centuries were two
landmark events: the English Civil War between 1642 and 1651, and
particularly the Glorious Revolution of 1688.

The Glorious Revolution limited the power of the king and the
executive, and relocated to Parliament the power to determine
economic institutions. At the same time, it opened up the political
system to a broad cross section of society, who were able to exert
considerable influence over the way the state functioned. The
Glorious Revolution was the foundation for creating a pluralistic
society, and it built on and accelerated a process of political
centralization. It created the world’s first set of inclusive political
institutions.

As a consequence, economic institutions also started becoming
more inclusive. Neither slavery nor the severe economic restrictions
of the feudal medieval period, such as serfdom, existed in England at
the beginning of the seventeenth century. Nevertheless, there were
many restrictions on economic activities people could engage in. Both
the domestic and international economy were choked by monopolies.
The state engaged in arbitrary taxation and manipulated the legal
system. Most land was caught in archaic forms of property rights that
made it impossible to sell and risky to invest in.

This changed after the Glorious Revolution. The government
adopted a set of economic institutions that provided incentives for
investment, trade, and innovation. It steadfastly enforced property
rights, including patents granting property rights for ideas, thereby
providing a major stimulus to innovation. It protected law and order.
Historically unprecedented was the application of English law to all
citizens. Arbitrary taxation ceased, and monopolies were abolished

almost completely. The English state aggressively promoted
mercantile activities and worked to promote domestic industry, not
only by removing barriers to the expansion of industrial activity but
also by lending the full power of the English navy to defend
mercantile interests. By rationalizing property rights, it facilitated the
construction of infrastructure, particularly roads, canals, and later
railways, that would prove to be crucial for industrial growth.

These foundations decisively changed incentives for people and
impelled the engines of prosperity, paving the way for the Industrial
Revolution. First and foremost, the Industrial Revolution depended on
major technological advances exploiting the knowledge base that had
accumulated in Europe during the past centuries. It was a radical
break from the past, made possible by scientific inquiry and the
talents of a number of unique individuals. The full force of this
revolution came from the market that created profitable opportunities
for technologies to be developed and applied. It was the inclusive
nature of markets that allowed people to allocate their talents to the
right lines of business. It also relied on education and skills, for it was
the relatively high levels of education, at least by the standards of the
time, that enabled the emergence of entrepreneurs with the vision to
employ new technologies for their businesses and to find workers
with the skills to use them.

It is not a coincidence that the Industrial Revolution started in
England a few decades following the Glorious Revolution. The great
inventors such as James Watt (perfecter of the steam engine), Richard
Trevithick (the builder of the first steam locomotive), Richard
Arkwright (the inventor of the spinning frame), and Isambard
Kingdom Brunei (the creator of several revolutionary steamships)
were able to take up the economic opportunities generated by their
ideas, were confident that their property rights would be respected,
and had access to markets where their innovations could be profitably
sold and used. In 1775, just after he had the patent renewed on his
steam engine, which he called his “Fire engine,” James Watt wrote to
his father:

Dear Father,

After a series of various and violent Oppositions I have at
last got an Act of Parliament vesting the property of my
new Fire engines in me and my Assigns, throughout Great
Britain & the plantations for twenty five years to come,
which I hope will be very beneficial to me, as there is
already considerable demand for them.

This letter reveals two things. First, Watt was motivated by the
market opportunities he anticipated, by the “considerable demand” in
Great Britain and its plantations, the English overseas colonies.
Second, it shows how he was able to influence Parliament to get what
he wanted since it was responsive to the appeals of individuals and
innovators.

The technological advances, the drive of businesses to expand and
invest, and the efficient use of skills and talent were all made possible
by the inclusive economic institutions that England developed. These
in turn were founded on her inclusive political institutions.

England developed these inclusive political institutions because of
two factors. First were political institutions, including a centralized
state, that enabled her to take the next radical — in fact,
unprecedented — step toward inclusive institutions with the onset of
the Glorious Revolution. While this factor distinguished England from
much of the world, it did not significantly differentiate it from
Western European countries such as France and Spain. More
important was the second factor. The events leading up to the
Glorious Revolution forged a broad and powerful coalition able to
place durable constraints on the power of the monarchy and the
executive, which were forced to be open to the demands of this
coalition. This laid the foundations for pluralistic political
institutions, which then enabled the development of economic
institutions that would underpin the first Industrial Revolution.

Small Differences That Matter

World inequality dramatically increased with the British, or English,
Industrial Revolution because only some parts of the world adopted
the innovations and new technologies that men such as Arkwright
and Watt, and the many who followed, developed. The response of
different nations to this wave of technologies, which determined
whether they would languish in poverty or achieve sustained
economic growth, was largely shaped by the different historical paths
of their institutions. By the middle of the eighteenth century, there
were already notable differences in political and economic
institutions around the world. But where did these differences come
from?

English political institutions were on their way to much greater
pluralism by 1688, compared with those in France and Spain, but if
we go back in time one hundred years, to 1588, the differences shrink
to almost nothing. All three countries were ruled by relatively
absolutist monarchs: Elizabeth I in England, Philip II in Spain, and
Henry II in France. All were battling with assemblies of citizens — such
as the Parliament in England, the Cortes in Spain, and the Estates-
General in France — that were demanding more rights and control
over the monarchy. These assemblies all had somewhat different
powers and scopes. For instance, the English Parliament and the
Spanish Cortes had power over taxation, while the Estates-General
did not. In Spain this mattered little, because after 1492 the Spanish
Crown had a vast American empire and benefited massively from the
gold and silver found there. In England the situation was different.
Elizabeth I was far less financially independent, so she had to beg
Parliament for more taxes. In exchange, Parliament demanded
concessions, in particular restrictions on the right of Elizabeth to
create monopolies. It was a conflict Parliament gradually won. In
Spain the Cortes lost a similar conflict. Trade wasn’t just
monopolized; it was monopolized by the Spanish monarchy.

These distinctions, which initially appeared small, started to matter
a great deal in the seventeenth century. Though the Americas had
been discovered by 1492 and Vasco da Gama had reached India by
rounding the Cape of Good Hope, at the southern tip of Africa, in

1498, it was only after 1600 that a huge expansion of world trade,
particularly in the Atlantic, started to take place. In 1585 the first
English colonization of North America began at Roanoke, in what is
now North Carolina. In 1600 the English East India Company was
formed. In 1602 it was followed by the Dutch equivalent. In 1607 the
colony of Jamestown was founded by the Virginia Company. By the
1620s the Caribbean was being colonized, with Barbados occupied in
1627. France was also expanding in the Atlantic, founding Quebec
City in 1608 as the capital of New France in what is now Canada. The
consequences of this economic expansion for institutions were very
different for England than for Spain and France because of small
initial differences.

Elizabeth I and her successors could not monopolize the trade with
the Americas. Other European monarchs could. So while in England,
Atlantic trade and colonization started creating a large group of
wealthy traders with few links to the Crown, this was not the case in
Spain or France. The English traders resented royal control and
demanded changes in political institutions and the restriction of royal
prerogatives. They played a critical role in the English Civil War and
the Glorious Revolution. Similar conflicts took place everywhere.
French kings, for example, faced the Fronde Rebellion between 1648
and 1652. The difference was that in England it was far more likely
that the opponents to absolutism would prevail because they were
relatively wealthy and more numerous than the opponents to
absolutism in Spain and France.

The divergent paths of English, French, and Spanish societies in the
seventeenth century illustrate the importance of the interplay of small
institutional differences with critical junctures. During critical
junctures, a major event or confluence of factors disrupts the existing
balance of political or economic power in a nation. These can affect
only a single country, such as the death of Chairman Mao Zedong in
1976, which at first created a critical juncture only for Communist
China. Often, however, critical junctures affect a whole set of
societies, in the way that, for example, colonization and then
decolonization affected most of the globe.

Such critical junctures are important because there are formidable
barriers against gradual improvements, resulting from the synergy
between extractive political and economic institutions and the
support they give each other. The persistence of this feedback loop
creates a vicious circle. Those who benefit from the status quo are
wealthy and well organized, and can effectively fight major changes
that will take away their economic privileges and political power.

Once a critical juncture happens, the small differences that matter
are the initial institutional differences that put in motion very
different responses. This is the reason why the relatively small
institutional differences in England, France, and Spain led to
fundamentally different development paths. The paths resulted from
the critical juncture created by the economic opportunities presented
to Europeans by Atlantic trade.

Even if small institutional differences matter greatly during critical
junctures, not all institutional differences are small, and naturally,
larger institutional differences lead to even more divergent patterns
during such junctures. While the institutional differences between
England and France were small in 1588, the differences between
Western and Eastern Europe were much greater. In the West, strong
centralized states such as England, France, and Spain had latent
constitutional institutions (Parliament, the Estates-General, and the
Cortes). There were also underlying similarities in economic
institutions, such as the lack of serfdom.

Eastern Europe was a different matter. The kingdom of Poland-
Lithuania, for example, was ruled by an elite class called the Szlachta,
who were so powerful they had even introduced elections for kings.
This was not absolute rule as in France under Louis XIV, the Sun
King, but absolutism of an elite, extractive political institutions all the
same. The Szlachta ruled over a mostly rural society dominated by
serfs, who had no freedom of movement or economic opportunities.
Farther east, the Russian emperor Peter the Great was also
consolidating an absolutism far more intense and extractive than even
Louis XIV could manage. Map 8 provides one simple way of seeing
the extent of the divergence between Western and Eastern Europe at

the beginning of the nineteenth century. It plots whether or not a
country still had serfdom in 1800. Countries that appear dark did;
those that are light did not. Eastern Europe is dark; Western Europe is
light.

Yet the institutions of Western Europe had not always been so
different from those in the East. They began, as we saw earlier, to
diverge in the fourteenth century when the Black Death hit in 1346.
There were small differences between political and economic
institutions in Western and Eastern Europe. England and Hungary
were even ruled by members of the same family, the Angevins. The
more important institutional differences that emerged after the Black
Death then created the background upon which the more significant
divergence between the East and the West would play out during the
seventeenth, eighteenth, and nineteenth centuries.

But where do the small institutional differences that start this
process of divergence arise in the first place? Why did Eastern Europe
have different political and economic institutions than the West in the
fourteenth century? Why was the balance of power between Crown
and Parliament different in England than in France and Spain? As we
will see in the next chapter, even societies that are far less complex
than our modern society create political and economic institutions
that have powerful effects on the lives of their members. This is true
even for hunter-gatherers, as we know from surviving societies such
as the San people of modern Botswana, who do not farm or even live
in permanent settlements.

No two societies create the same institutions; they will have distinct
customs, different systems of property rights, and different ways of
dividing a killed animal or loot stolen from another group. Some will
recognize the authority of elders, others will not; some will achieve
some degree of political centralization early on, but not others.
Societies are constantly subject to economic and political conflict that
is resolved in different ways because of specific historical differences,
the role of individuals, or just random factors.

These differences are often small to start with, but they cumulate,
creating a process of institutional drift. Just as two isolated

populations of organisms will drift apart slowly in a process of genetic
drift, because random genetic mutations cumulate, two otherwise
similar societies will also slowly drift apart institutionally. Though,
just like genetic drift, institutional drift has no predetermined path
and does not even need to be cumulative; over centuries it can lead to
perceptible, sometimes important differences. The differences created
by institutional drift become especially consequential, because they
influence how society reacts to changes in economic or political
circumstances during critical junctures.

M;ip 8: Serfdom in Europe in 180U

The richly divergent patterns of economic development around the
world hinge on the interplay of critical junctures and institutional
drift. Existing political and economic institutions — sometimes shaped
by a long process of institutional drift and sometimes resulting from

divergent responses to prior critical junctures — create the anvil upon
which future change will be forged. The Black Death and the
expansion of world trade after 1600 were both major critical
junctures for European powers and interacted with different initial
institutions to create a major divergence. Because in 1346 in Western
Europe peasants had more power and autonomy than they did in
Eastern Europe, the Black Death led to the dissolution of feudalism in
the West and the Second Serfdom in the East. Because Eastern and
Western Europe had started to diverge in the fourteenth century, the
new economic opportunities of the seventeenth, eighteenth, and
nineteenth centuries would also have fundamentally different
implications for these different parts of Europe. Because in 1600 the
grip of the Crown was weaker in England than in France and Spain,
Atlantic trade opened the way to the creation of new institutions with
greater pluralism in England, while strengthening the French and
Spanish monarchs.

The Contingent Path of History

The outcomes of the events during critical junctures are shaped by
the weight of history, as existing economic and political institutions
shape the balance of power and delineate what is politically feasible.
The outcome, however, is not historically predetermined but
contingent. The exact path of institutional development during these
periods depends on which one of the opposing forces will succeed,
which groups will be able to form effective coalitions, and which
leaders will be able to structure events to their advantage.

The role of contingency can be illustrated by the origins of
inclusive political institutions in England. Not only was there nothing
preordained in the victory of the groups vying for limiting the power
of the Crown and for more pluralistic institutions in the Glorious
Revolution of 1688, but the entire path leading up to this political
revolution was at the mercy of contingent events. The victory of the
winning groups was inexorably linked to the critical juncture created
by the rise of Atlantic trade that enriched and emboldened merchants

opposing the Crown. But a century earlier it was far from obvious
that England would have any ability to dominate the seas, colonize
many parts of the Caribbean and North America, or capture so much
of the lucrative trade with the Americas and the East. Neither
Elizabeth I nor other Tudor monarchs before her had built a powerful,
unified navy. The English navy relied on privateers and independent
merchant ships and was much less powerful than the Spanish fleet.
The profits of the Atlantic nonetheless attracted these privateers,
challenging the Spanish monopoly of the ocean. In 1588 the Spanish
decided to put an end to these challenges to their monopoly, as well
as to English meddling in the Spanish Netherlands, at the time
fighting against Spain for independence.

The Spanish monarch Philip II sent a powerful fleet, the Armada,
commanded by the Duke of Medina Sidonia. It appeared a foregone
conclusion to many that the Spanish would conclusively defeat the
English, solidify their monopoly of the Atlantic, and probably
overthrow Elizabeth I, perhaps ultimately gaining control of the
British Isles. Yet something very different transpired. Bad weather and
strategic mistakes by Sidonia, who had been put in charge at the last
minute after a more experienced commander died, made the Spanish
Armada lose their advantage. Against all odds, the English destroyed
much of the fleet of their more powerful opponents. The Atlantic seas
were now open to the English on more equal terms. Without this
unlikely victory for the English, the events that would create the
transformative critical juncture and spawn the distinctively pluralistic
political institutions of post- 1688 England would never have got
moving. Map 9 shows the trail of Spanish shipwrecks as the Armada
was chased right around the British Isles.

Of course, nobody in 1588 could foresee the consequences of the
fortunate English victory. Few probably understood at the time that
this would create a critical juncture leading up to a major political
revolution a century later.

There should be no presumption that any critical juncture will lead
to a successful political revolution or to change for the better. History
is full of examples of revolutions and radical movements replacing

one tyranny with another, in a pattern that the German sociologist
Robert Michels dubbed the iron law of oligarchy, a particularly
pernicious form of the vicious circle. The end of colonialism in the
decades following the Second World War created critical junctures for
many former colonies. However, in most cases in sub-Saharan Africa
and many in Asia, the postindependence governments simply took a
page out of Robert Michels’s book and repeated and intensified the
abuses of their predecessors, often severely narrowing the distribution
of political power, dismantling constraints, and undermining the
already meager incentives that economic institutions provided for
investment and economic progress. It was only in a few cases,
societies such as Botswana (see this page), that critical junctures were
used to launch a process of political and economic change that paved
the way for economic growth.

Ireland

Atlantic Ocean

Portugal

Uirtlv

Spain

• .'mi.

lrT

United Kingdom*

• V

Belgium

France

Andorra

* .\tjivk1j routes
Shipwrecks
Modem boundaries

Ciibraltar

Map 9: The Spanish Armada, shipwrecks, and key places
that made the Turning Point

Critical junctures can also result in major change toward rather
than away from extractive institutions. Inclusive institutions, even
though they have their own feedback loop, the virtuous circle, can

also reverse course and become gradually more extractive because of
challenges during critical junctures — and whether this happens is,
again, contingent. The Venetian Republic, as we will see in chapter 6,
made major strides toward inclusive political and economic
institutions in the medieval period. But while such institutions
became gradually stronger in England after the Glorious Revolution of
1688, in Venice they ultimately transformed themselves into
extractive institutions under the control of a narrow elite that
monopolized both economic opportunities and political power.

Understanding the Lay of the Land

The emergence of a market economy based on inclusive institutions
and sustained economic growth in eighteenth-century England sent
ripples all around the world, not least because it allowed England to
colonize a large part of it. But if the influence of English economic
growth certainly spread around the globe, the economic and political
institutions that created it did not automatically do so. The diffusion
of the Industrial Revolution had different effects on the world in the
same way that the Black Death had different effects on Western and
Eastern Europe, and in the same way that the expansion of Atlantic
trade had different effects in England and Spain. It was the
institutions in place in different parts of the world that determined
the impact, and these institutions were indeed different — small
differences had been amplified over time by prior critical junctures.
These institutional differences and their implications have tended to
persist to the present due to the vicious and virtuous circles, albeit
imperfectly, and are the key to understanding both how world
inequality emerged and the nature of the lay of the land around us.

Some parts of the world developed institutions that were very close
to those in England, though by a very different route. This was
particularly true of some European “settler colonies” such as
Australia, Canada, and the United States, though their institutions
were just forming as the Industrial Revolution was getting under way.
As we saw in chapter 1, a process starting with the foundation of the

Jamestown colony in 1607 and culminating in the War of
Independence and the enactment of the U.S. Constitution shares many
of the same characteristics as the long struggle in England of
Parliament against the monarchy, for it also led to a centralized state
with pluralistic political institutions. The Industrial Revolution then
spread rapidly to such countries.

Western Europe, experiencing many of the same historical
processes, had institutions similar to England at the time of the
Industrial Revolution. There were small but consequential differences
between England and the rest, which is why the Industrial Revolution
happened in England and not France. This revolution then created an
entirely new situation and considerably different sets of challenges to
European regimes, which in turn spawned a new set of conflicts
culminating in the French Revolution. The French Revolution was
another critical juncture that led the institutions of Western Europe to
converge with those of England, while Eastern Europe diverged
further.

The rest of the world followed different institutional trajectories.
European colonization set the stage for institutional divergence in the
Americas, where in contrast to the inclusive institutions developed in
the United States and Canada extractive ones emerged in Latin
America, which explains the patterns of inequality we see in the
Americas. The extractive political and economic institutions of the
Spanish conquistadors in Latin America have endured, condemning
much of the region to poverty. Argentina and Chile have, however,
fared better than most other countries in the region. They had few
indigenous people or mineral riches and were “neglected” while the
Spanish focused on the lands occupied by the Aztec, Maya, and Incan
civilizations. Not coincidentally, the poorest part of Argentina is the
northwest, the only section of the country integrated into the Spanish
colonial economy. Its persistent poverty, the legacy of extractive
institutions, is similar to that created by the Potosi mita in Bolivia and
Peru (this page- this page).

Africa was the part of the world with the institutions least able to
take advantage of the opportunities made available by the Industrial

Revolution. For at least the last one thousand years, outside of small
pockets and during limited periods of time, Africa has lagged behind
the rest of the world in terms of technology, political development,
and prosperity. It is the part of the world where centralized states
formed very late and very tenuously. Where they did form, they were
likely as highly absolutist as the Kongo and often short lived, usually
collapsing. Africa shares this trajectory of lack of state centralization
with countries such as Afghanistan, Haiti, and Nepal, which have also
failed to impose order over their territories and create anything
resembling stability to achieve even a modicum of economic progress.
Though located in very different parts of the world, Afghanistan,
Haiti, and Nepal have much in common institutionally with most
nations in sub-Saharan Africa, and are thus some of the poorest
countries in the world today.

How African institutions evolved into their present-day extractive
form again illustrates the process of institutional drift punctuated by
critical junctures, but this time often with highly perverse outcomes,
particularly during the expansion of the Atlantic slave trade. There
were new economic opportunities for the Kingdom of Kongo when
European traders arrived. The long-distance trade that transformed
Europe also transformed the Kingdom of Kongo, but again, initial
institutional differences mattered. Kongolese absolutism
transmogrified from completely dominating society, with extractive
economic institutions that merely captured all the agricultural output
of its citizens, to enslaving people en masse and selling them to the
Portuguese in exchange for guns and luxury goods for the Kongolese
elite.

The initial differences between England and Kongo meant that
while new long-distance trade opportunities created a critical
juncture toward pluralistic political institutions in the former, they
also extinguished any hope of absolutism being defeated in the
Kongo. In much of Africa the substantial profits to be had from
slaving led not only to its intensification and even more insecure
property rights for the people but also to intense warfare and the
destruction of many existing institutions; within a few centuries, any

process of state centralization was totally reversed, and many of the
African states had largely collapsed. Though some new, and
sometimes powerful, states did form to exploit the slave trade, they
were based on warfare and plunder. The critical juncture of the
discovery of the Americas may have helped England develop inclusive
institutions but it made institutions in Africa even more extractive.

Though the slave trade mostly ended after 1807, subsequent
European colonialism not only threw into reverse nascent economic
modernization in parts of southern and western Africa but also cut off
any possibility of indigenous institutional reform. This meant that
even outside of areas such as Congo, Madagascar, Namibia, and
Tanzania, the areas where plunder, mass disruption, and even whole-
scale murder were the rule, there was little chance for Africa to
change its institutional path.

Even worse, the structures of colonial rule left Africa with a more
complex and pernicious institutional legacy in the 1960s than at the
start of the colonial period. The development of the political and
economic institutions in many African colonies meant that rather than
creating a critical juncture for improvements in their institutions,
independence created an opening for unscrupulous leaders to take
over and intensify the extraction that European colonialists presided
over. The political incentives these structures created led to a style of
politics that reproduced the historical patterns of insecure and
inefficient property rights under states with strong absolutist
tendencies but nonetheless lacking any centralized authority over
their territories.

The Industrial Revolution has still not spread to Africa because that
continent has experienced a long vicious circle of the persistence and
re-creation of extractive political and economic institutions. Botswana
is the exception. As we will see (this page-this page), in the
nineteenth century, King Khama, the grandfather of Botswana’s first
prime minister at independence, Seretse Khama, initiated institutional
changes to modernize the political and economic institutions of his
tribe. Quite uniquely, these changes were not destroyed in the
colonial period, partly as a consequence of Khama’s and other chiefs’

clever challenges to colonial authority. Their interplay with the
critical juncture that independence from colonial rule created laid the
foundations for Botswana’s economic and political success. It was
another case of small historical differences mattering.

There is a tendency to see historical events as the inevitable
consequences of deep-rooted forces. While we place great emphasis
on how the history of economic and political institutions creates
vicious and virtuous circles, contingency, as we have emphasized in
the context of the development of English institutions, can always be
a factor. Seretse Khama, studying in England in the 1940s, fell in love
with Ruth Williams, a white woman. As a result, the racist apartheid
regime in South Africa persuaded the English government to ban him
from the protectorate, then called Bechuanaland (whose
administration was under the High Commissioner of South Africa),
and he resigned his kingship. When he returned to lead the
anticolonial struggle, he did so with the intention not of entrenching
the traditional institutions but of adapting them to the modern world.
Khama was an extraordinary man, uninterested in personal wealth
and dedicated to building his country. Most other African countries
have not been so fortunate. Both things mattered, the historical
development of institutions in Botswana and contingent factors that
led these to be built on rather than overthrown or distorted as they
were elsewhere in Africa.

In the nineteenth century, absolutism not so different from that in Africa
or Eastern Europe was blocking the path of industrialization in much
of Asia. In China, the state was strongly absolutist, and independent
cities, merchants, and industrialists were either nonexistent or much
weaker politically. China was a major naval power and heavily
involved in long-distance trade centuries before the Europeans. But it
had turned away from the oceans just at the wrong time, when Ming
emperors decided in the late fourteenth and early fifteenth centuries
that increased long-distance trade and the creative destruction that it
might bring would be likely to threaten their rule.

In India, institutional drift worked differently and led to the
development of a uniquely rigid hereditary caste system that limited
the functioning of markets and the allocation of labor across
occupations much more severely than the feudal order in medieval
Europe. It also underpinned another strong form of absolutism under
the Mughal rulers. Most European countries had similar systems in
the Middle Ages. Modern Anglo-Saxon surnames such as Baker,
Cooper, and Smith are direct descendants of hereditary occupational
categories. Bakers baked, coopers made barrels, and smiths forged
metals. But these categories were never as rigid as Indian caste
distinctions and gradually became meaningless as predictors of a
person’s occupation. Though Indian merchants did trade throughout
the Indian Ocean, and a major textile industry developed, the caste
system and Mughal absolutism were serious impediments to the
development of inclusive economic institutions in India. By the
nineteenth century, things were even less hospitable for
industrialization as India became an extractive colony of the English.
China was never formally colonized by a European power, but after
the English successfully defeated the Chinese in the Opium Wars
between 1839 and 1842, and then again between 1856 and 1860,
China had to sign a series of humiliating treaties and allow European
exports to enter. As China, India, and others failed to take advantage
of commercial and industrial opportunities, Asia, except for Japan,
lagged behind as Western Europe was forging ahead.

The course of institutional development that Japan charted in the
nineteenth century again illustrates the interaction between critical
junctures and small differences created by institutional drift. Japan,
like China, was under absolutist rule. The Tokugawa family took over
in 1600 and ruled over a feudal system that also banned international
trade. Japan, too, faced a critical juncture created by Western
intervention as four U.S. warships, commanded by Matthew C. Perry,
entered Edo Bay in July 1853, demanding trade concessions similar to
those England obtained from the Chinese in the Opium Wars. But this

critical juncture played out very differently in Japan. Despite their
proximity and frequent interactions, by the nineteenth century China
and Japan had already drifted apart institutionally.

While Tokugawa rule in Japan was absolutist and extractive, it had
only a tenuous hold on the leaders of the other major feudal domains
and was susceptible to challenge. Even though there were peasant
rebellions and civil strife, absolutism in China was stronger, and the
opposition less organized and autonomous. There were no equivalents
of the leaders of the other domains in China who could challenge the
absolutist rule of the emperor and trace an alternative institutional
path. This institutional difference, in many ways small relative to the
differences separating China and Japan from Western Europe, had
decisive consequences during the critical juncture created by the
forceful arrival of the English and Americans. China continued in its
absolutist path after the Opium Wars, while the U.S. threat cemented
the opposition to Tokugawa rule in Japan and led to a political
revolution, the Meiji Restoration, as we will see in chapter 10. This
Japanese political revolution enabled more inclusive political
institutions and much more inclusive economic institutions to
develop, and laid the foundations for subsequent rapid Japanese
growth, while China languished under absolutism.

How Japan reacted to the threat posed by U.S. warships, by starting
a process of fundamental institutional transformation, helps us
understand another aspect of the lay of the land around us:
transitions from stagnation to rapid growth. South Korea, Taiwan,
and finally China achieved breakneck rates of economic growth since
the Second World War through a path similar to the one that Japan
took. In each of these cases, growth was preceded by historic changes
in the countries’ economic institutions — though not always in their
political institutions, as the Chinese case highlights.

The logic of how episodes of rapid growth come to an abrupt end
and are reversed is also related. In the same way that decisive steps
toward inclusive economic institutions can ignite rapid economic
growth, a sharp turn away from inclusive institutions can lead to
economic stagnation. But more often, collapses of rapid growth, such

as in Argentina or the Soviet Union, are a consequence of growth
under extractive institutions coming to an end. As we have seen, this
can happen either because of infighting over the spoils of extraction,
leading to the collapse of the regime, or because the inherent lack of
innovation and creative destruction under extractive institutions puts
a limit on sustained growth. How the Soviets ran hard into these
limits will be discussed in greater detail in the next chapter.

If the political and economic institutions of Latin America over the past
five hundred years were shaped by Spanish colonialism, those of the
Middle East were shaped by Ottoman colonialism. In 1453 the
Ottomans under Sultan Mehmet II captured Constantinople, making it
their capital. During the rest of the century, the Ottomans conquered
large parts of the Balkans and most of the rest of Turkey. In the first
half of the sixteenth century, Ottoman rule spread throughout the
Middle East and North Africa. By 1566, at the death of Sultan
Suleyman I, known as the Magnificent, their empire stretched from
Tunisia in the East, through Egypt, all the way to Mecca in the
Arabian Peninsula, and on to what is now modern Iraq. The Ottoman
state was absolutist, with the sultan accountable to few and sharing
power with none. The economic institutions the Ottomans imposed
were highly extractive. There was no private property in land, which
all formally belonged to the state. Taxation of land and agricultural
output, together with loot from war, was the main source of
government revenues. However, the Ottoman state did not dominate
the Middle East in the same way that it could dominate its heartland
in Anatolia or even to the extent that the Spanish state dominated
Latin American society. The Ottoman state was continuously
challenged by Bedouins and other tribal powers in the Arabian
Peninsula. It lacked not only the ability to impose a stable order in
much of the Middle East but also the administrative capacity to
collect taxes. So it “farmed” them out to individuals, selling off the
right to others to collect taxes in whatever way they could. These tax
farmers became autonomous and powerful. Rates of taxation in the

Middle Eastern territories were very high, varying between one-half
or two-thirds of what farmers produced. Much of this revenue was
kept by the tax farmers. Because the Ottoman state failed to establish
a stable order in these areas, property rights were far from secure,
and there was a great deal of lawlessness and banditry as armed
groups vied for local control. In Palestine, for example, the situation
was so dire that starting in the late sixteenth century, peasants left the
most fertile land and moved up to mountainous areas, which gave
them greater protection against banditry.

Extractive economic institutions in the urban areas of the Ottoman
Empire were no less stifling. Commerce was under state control, and
occupations were strictly regulated by guilds and monopolies. The
consequence was that at the time of the Industrial Revolution the
economic institutions of the Middle East were extractive. The region
stagnated economically.

By the 1840s, the Ottomans were trying to reform institutions — for
example, by reversing tax farming and getting locally autonomous
groups under control. But absolutism persisted until the First World
War, and reform efforts were thwarted by the usual fear of creative
destruction and the anxiety among elite groups that they would lose
economically or politically. While Ottoman reformers talked of
introducing private property rights to land in order to increase
agricultural productivity, the status quo persisted because of the
desire for political control and taxation. Ottoman colonization was
followed by European colonization after 1918. When European
control ended, the same dynamics we have seen in sub-Saharan Africa
took hold, with extractive colonial institutions taken over by
independent elites. In some cases, such as the monarchy of Jordan,
these elites were direct creations of the colonial powers, but this, too,
happened frequently in Africa, as we will see. Middle Eastern
countries without oil today have income levels similar to poor Latin
American nations. They did not suffer from such immiserizing forces
as the slave trade, and they benefited for a longer period from flows
of technology from Europe. In the Middle Ages, the Middle East itself
was also a relatively advanced part of the world economically. So

today it is not as poor as Africa, but the majority of its people still live
in poverty.

We have seen that neither geographic- nor cultural- nor ignorance-based
theories are helpful for explaining the lay of the land around us. They
do not provide a satisfactory account for the prominent patterns of
world inequality: the fact that the process of economic divergence
started with the Industrial Revolution in England during the
eighteenth and nineteenth centuries and then spread to Western
Europe and to European settler colonies; the persistent divergence
between different parts of the Americas; the poverty of Africa or the
Middle East; the divergence between Eastern and Western Europe;
and the transitions from stagnation to growth and the sometimes
abrupt end to growth spurts. Our institutional theory does.

In the remaining chapters, we will discuss in greater detail how this
institutional theory works and illustrate the wide range of phenomena
it can account for. These range from the origins of the Neolithic
Revolution to the collapse of several civilizations, either because of
the intrinsic limits to growth under extractive institutions or because
of limited steps toward inclusiveness being reversed.

We will see how and why decisive steps toward inclusive political
institutions were taken during the Glorious Revolution in England.
We will look more specifically at the following:

• How inclusive institutions emerged from the interplay of the
critical juncture created by Atlantic trade and the nature of
preexisting English institutions.

• How these institutions persisted and became strengthened to
lay the foundations for the Industrial Revolution, thanks in
part to the virtuous circle and in part to fortunate turns of
contingency.

• How many regimes reigning over absolutist and extractive
institutions steadfastly resisted the spread of new
technologies unleashed by the Industrial Revolution.

• How Europeans themselves stamped out the possibility of
economic growth in many parts of the world that they
conquered.

• How the vicious circle and the iron law of oligarchy have
created a powerful tendency for extractive institutions to
persist, and thus the lands where the Industrial Revolution
originally did not spread remain relatively poor.

• Why the Industrial Revolution and other new technologies
have not spread and are unlikely to spread to places around
the world today where a minimum degree of centralization
of the state hasn’t been achieved.

Our discussion will also show that certain areas that managed to
transform institutions in a more inclusive direction, such as France or
Japan, or that prevented the establishment of extractive institutions,
such as the United States or Australia, were more receptive to the
spread of the Industrial Revolution and pulled ahead of the rest. As in
England, this was not always a smooth process, and along the way,
many challenges to inclusive institutions were overcome, sometimes
because of the dynamics of the virtuous circle, sometimes thanks to
the contingent path of history.

Finally, we will also discuss how the failure of nations today is
heavily influenced by their institutional histories, how much policy
advice is informed by incorrect hypotheses and is potentially
misleading, and how nations are still able to seize critical junctures
and break the mold to reform their institutions and embark upon a
path to greater prosperity.

5 .

“I’VE SEEN THE FUTURE, AND IT WORKS”: GROWTH UNDER

EXTRACTIVE INSTITUTIONS

I’ve Seen the Future

Institutional differences play the critical role in explaining economic

growth throughout the ages. But if most societies in history are based
on extractive political and economic institutions, does this imply that
growth never takes place? Obviously not. Extractive institutions, by
their very logic, must create wealth so that it can be extracted. A
ruler monopolizing political power and in control of a centralized
state can introduce some degree of law and order and a system of
rules, and stimulate economic activity.

But growth under extractive institutions differs in nature from
growth brought forth by inclusive institutions. Most important, it will
be not sustained growth that requires technological change, but
rather growth based on existing technologies. The economic
trajectory of the Soviet Union provides a vivid illustration of how the
authority and incentives provided by the state can spearhead rapid
economic growth under extractive institutions and how this type of
growth ultimately comes to an end and collapses.

The First World War had ended and the victorious and the vanquished
powers met in the great palace of Versailles, outside Paris, to decide
on the parameters of the peace. Prominent among the attendees was
Woodrow Wilson, president of the United States. Noticeable by its
absence was any representation from Russia. The old tsarist regime
had been overthrown by the Bolsheviks in October 1917. A civil war

then raged between the Reds (the Bolsheviks) and the Whites. The
English, French, and Americans sent an expeditionary force to fight
against the Bolsheviks. A mission led by a young diplomat, William
Bullitt, and the veteran intellectual and journalist Lincoln Steffens
was sent to Moscow to meet with Lenin to try to understand the
intentions of the Bolsheviks and how to come to terms with them.
Steffens had made his name as an iconoclast, a muckraker journalist
who had persistently denounced the evils of capitalism in the United
States. He had been in Russia at the time of the revolution. His
presence was intended to make the mission look credible and not too
hostile. The mission returned with the outlines of an offer from Lenin
about what it would take for peace with the newly created Soviet
Union. Steffens was bowled over by what he saw as the great
potential of the Soviet regime.

“Soviet Russia,” he recalled in his 1931 autobiography, “was a
revolutionary government with an evolutionary plan. Their plan was
not to end evils such as poverty and riches, graft, privilege, tyranny,
and war by direct action, but to seek out and remove their causes.
They had set up a dictatorship, supported by a small, trained
minority, to make and maintain for a few generations a scientific
rearrangement of economic forces which would result in economic
democracy first and political democracy last.”

When Steffens returned from his diplomatic mission he went to see
his old friend the sculptor Jo Davidson and found him making a
portrait bust of the wealthy financier Bernard Baruch. “So you’ve
been over in Russia,” Baruch remarked. Steffens answered, “I have
been over into the future, and it works.” He would perfect this adage
into a form that went down in history: “I’ve seen the future, and it
works.”

Right up until the early 1980s, many Westerners were still seeing
the future in the Soviet Union, and they kept on believing that it was
working. In a sense it was, or at least it did for a time. Lenin had died
in 1924, and by 1927 Joseph Stalin had consolidated his grip on the
country. He purged his opponents and launched a drive to rapidly
industrialize the country. He did it via energizing the State Planning

Committee, Gosplan, which had been founded in 1921. Gosplan wrote
the first Five-Year Plan, which ran between 1928 and 1933. Economic
growth Stalin style was simple: develop industry by government
command and obtain the necessary resources for this by taxing
agriculture at very high rates. The communist state did not have an
effective tax system, so instead Stalin “collectivized” agriculture. This
process entailed the abolition of private property rights to land and
the herding of all people in the countryside into giant collective farms
run by the Communist Party. This made it much easier for Stalin to
grab agricultural output and use it to feed all the people who were
building and manning the new factories. The consequences of this for
the rural folk were calamitous. The collective farms completely lacked
incentives for people to work hard, so production fell sharply. So
much of what was produced was extracted that there was not enough
to eat. People began to starve to death. In the end, probably six
million people died of famine, while hundreds of thousands of others
were murdered or banished to Siberia during the forcible
collectivization.

Neither the newly created industry nor the collectivized farms were
economically efficient in the sense that they made the best use of
what resources the Soviet Union possessed. It sounds like a recipe for
economic disaster and stagnation, if not outright collapse. But the
Soviet Union grew rapidly. The reason for this is not difficult to
understand. Allowing people to make their own decisions via markets
is the best way for a society to efficiently use its resources. When the
state or a narrow elite controls all these resources instead, neither the
right incentives will be created nor will there be an efficient
allocation of the skills and talents of people. But in some instances the
productivity of labor and capital may be so much higher in one sector
or activity, such as heavy industry in the Soviet Union, that even a
top-down process under extractive institutions that allocates resources
toward that sector can generate growth. As we saw in chapter 3,
extractive institutions in Caribbean islands such as Barbados, Cuba,
Haiti, and Jamaica could generate relatively high levels of incomes
because they allocated resources to the production of sugar, a

commodity coveted worldwide. The production of sugar based on
gangs of slaves was certainly not “efficient,” and there was no
technological change or creative destruction in these societies, but
this did not prevent them from achieving some amount of growth
under extractive institutions. The situation was similar in the Soviet
Union, with industry playing the role of sugar in the Caribbean.
Industrial growth in the Soviet Union was further facilitated because
its technology was so backward relative to what was available in
Europe and the United States, so large gains could be reaped by
reallocating resources to the industrial sector, even if all this was
done inefficiently and by force.

Before 1928 most Russians lived in the countryside. The technology
used by peasants was primitive, and there were few incentives to be
productive. Indeed, the last vestiges of Russian feudalism were
eradicated only shortly before the First World War. There was thus
huge unrealized economic potential from reallocating this labor from
agriculture to industry. Stalinist industrialization was one brutal way
of unlocking this potential. By fiat, Stalin moved these very poorly
used resources into industry, where they could be employed more
productively, even if industry itself was very inefficiently organized
relative to what could have been achieved. In fact, between 1928 and
1960 national income grew at 6 percent a year, probably the most
rapid spurt of economic growth in history up until then. This quick
economic growth was not created by technological change, but by
reallocating labor and by capital accumulation through the creation
of new tools and factories.

Growth was so rapid that it took in generations of Westerners, not
just Lincoln Steffens. It took in the Central Intelligence Agency of the
United States. It even took in the Soviet Union’s own leaders, such as
Nikita Khrushchev, who famously boasted in a speech to Western
diplomats in 1956 that “we will bury you [the West].” As late as
1977, a leading academic textbook by an English economist argued
that Soviet-style economies were superior to capitalist ones in terms
of economic growth, providing full employment and price stability
and even in producing people with altruistic motivation. Poor old

Western capitalism did better only at providing political freedom.
Indeed, the most widely used university textbook in economics,
written by Nobel Prize-winner Paul Samuelson, repeatedly predicted
the coming economic dominance of the Soviet Union. In the 1961
edition, Samuelson predicted that Soviet national income would
overtake that of the United States possibly by 1984, but probably by
1997. In the 1980 edition there was little change in the analysis,
though the two dates were delayed to 2002 and 2012.

Though the policies of Stalin and subsequent Soviet leaders could
produce rapid economic growth, they could not do so in a sustained
way. By the 1970s, economic growth had all but stopped. The most
important lesson is that extractive institutions cannot generate
sustained technological change for two reasons: the lack of economic
incentives and resistance by the elites. In addition, once all the very
inefficiently used resources had been reallocated to industry, there
were few economic gains to be had by fiat. Then the Soviet system hit
a roadblock, with lack of innovation and poor economic incentives
preventing any further progress. The only area in which the Soviets
did manage to sustain some innovation was through enormous efforts
in military and aerospace technology. As a result they managed to put
the first dog, Leika, and the first man, Yuri Gagarin, in space. They
also left the world the AK-47 as one of their legacies.

Gosplan was the supposedly all-powerful planning agency in charge
of the central planning of the Soviet economy. One of the benefits of
the sequence of five-year plans written and administered by Gosplan
was supposed to have been the long time horizon necessary for
rational investment and innovation. In reality, what got implemented
in Soviet industry had little to do with the five-year plans, which
were frequently revised and rewritten or simply ignored. The
development of industry took place on the basis of commands by
Stalin and the Politburo, who changed their minds frequently and
often completely revised their previous decisions. All plans were
labeled “draft” or “preliminary.” Only one copy of a plan labeled
“final” — that for light industry in 1939 — has ever come to light. Stalin
himself said in 1937 that “only bureaucrats can think that planning

work ends with the creation of the plan. The creation of the plan is
just the beginning. The real direction of the plan develops only after
the putting together of the plan.” Stalin wanted to maximize his
discretion to reward people or groups who were politically loyal, and
punish those who were not. As for Gosplan, its main role was to
provide Stalin with information so he could better monitor his friends
and enemies. It actually tried to avoid making decisions. If you made
a decision that turned out badly, you might get shot. Better to avoid
all responsibility.

An example of what could happen if you took your job too
seriously, rather than successfully second-guessing what the
Communist Party wanted, is provided by the Soviet census of 1937.
As the returns came in, it became clear that they would show a
population of about 162 million, far less than the 180 million Stalin
had anticipated and indeed below the figure of 168 million that Stalin
himself announced in 1934. The 1937 census was the first conducted
since 1926, and therefore the first one that followed the mass famines
and purges of the early 1930s. The accurate population numbers
reflected this. Stalin’s response was to have those who organized the
census arrested and sent to Siberia or shot. He ordered another
census, which took place in 1939. This time the organizers got it
right; they found that the population was actually 171 million.

Stalin understood that in the Soviet economy, people had few
incentives to work hard. A natural response would have been to
introduce such incentives, and sometimes he did — for example, by
directing food supplies to areas where productivity had fallen — to
reward improvements. Moreover, as early as 1931 he gave up on the
idea of creating “socialist men and women” who would work without
monetary incentives. In a famous speech he criticized “equality
mongering,” and thereafter not only did different jobs get paid
different wages but also a bonus system was introduced. It is
instructive to understand how this worked. Typically a firm under
central planning had to meet an output target set under the plan,
though such plans were often renegotiated and changed. From the
1930s, workers were paid bonuses if the output levels were attained.

These could be quite high — for instance, as much as 37 percent of the
wage for management or senior engineers. But paying such bonuses
created all sorts of disincentives to technological change. For one
thing, innovation, which took resources away from current
production, risked the output targets not being met and the bonuses
not being paid. For another, output targets were usually based on
previous production levels. This created a huge incentive never to
expand output, since this only meant having to produce more in the
future, since future targets would be “ratcheted up.”
Underachievement was always the best way to meet targets and get
the bonus. The fact that bonuses were paid monthly also kept
everyone focused on the present, while innovation is about making
sacrifices today in order to have more tomorrow.

Even when bonuses and incentives were effective in changing
behavior, they often created other problems. Central planning was
just not good at replacing what the great eighteenth-century
economist Adam Smith called the “invisible hand” of the market.
When the plan was formulated in tons of steel sheet, the sheet was
made too heavy. When it was formulated in terms of area of steel
sheet, the sheet was made too thin. When the plan for chandeliers
was made in tons, they were so heavy, they could hardly hang from
ceilings.

By the 1940s, the leaders of the Soviet Union, even if not their
admirers in the West, were well aware of these perverse incentives.
The Soviet leaders acted as if they were due to technical problems,
which could be fixed. For example, they moved away from paying
bonuses based on output targets to allowing firms to set aside
portions of profits to pay bonuses. But a “profit motive” was no more
encouraging to innovation than one based on output targets. The
system of prices used to calculate profits was almost completely
unconnected to the value of new innovations or technology. Unlike in
a market economy, prices in the Soviet Union were set by the
government, and thus bore little relation to value. To more
specifically create incentives for innovation, the Soviet Union
introduced explicit innovation bonuses in 1946. As early as 1918, the

principle had been recognized that an innovator should receive
monetary rewards for his innovation, but the rewards set were small
and unrelated to the value of the new technology. This changed only
in 1956, when it was stipulated that the bonus should be proportional
to the productivity of the innovation. However, since productivity
was calculated in terms of economic benefits measured using the
existing system of prices, this was again not much of an incentive to
innovate. One could fill many pages with examples of the perverse
incentives these schemes generated. For example, because the size of
the innovation bonus fund was limited by the wage bill of a firm, this
immediately reduced the incentive to produce or adopt any
innovation that might have economized on labor.

Focusing on the different rules and bonus schemes tends to mask
the inherent problems of the system. As long as political authority
and power rested with the Communist Party, it was impossible to
fundamentally change the basic incentives that people faced, bonuses
or no bonuses. Since its inception, the Communist Party had used not
just carrots but also sticks, big sticks, to get its way. Productivity in
the economy was no different. A whole set of laws created criminal
offenses for workers who were perceived to be shirking. In June
1940, for example, a law made absenteeism, defined as any twenty
minutes unauthorized absence or even idling on the job, a criminal
offense that could be punished by six months’ hard labor and a 25
percent cut in pay. All sorts of similar punishments were introduced,
and were implemented with astonishing frequency. Between 1940
and 1955, 36 million people, about one-third of the adult population,
were found guilty of such offenses. Of these, 15 million were sent to
prison and 250,000 were shot. In any year, there would be 1 million
adults in prison for labor violations; this is not to mention the 2.5
million people Stalin exiled to the gulags of Siberia. Still, it didn’t
work. Though you can move someone to a factory, you cannot force
people to think and have good ideas by threatening to shoot them.
Coercion like this might have generated a high output of sugar in
Barbados or Jamaica, but it could not compensate for the lack of
incentives in a modern industrial economy.

The fact that truly effective incentives could not be introduced in
the centrally planned economy was not due to technical mistakes in
the design of the bonus schemes. It was intrinsic to the whole method
by which extractive growth had been achieved. It had been done by
government command, which could solve some basic economic
problems. But stimulating sustained economic growth required that
individuals use their talent and ideas, and this could never be done
with a Soviet-style economic system. The rulers of the Soviet Union
would have had to abandon extractive economic institutions, but such
a move would have jeopardized their political power. Indeed, when
Mikhail Gorbachev started to move away from extractive economic
institutions after 1987, the power of the Communist Party crumbled,
and with it, the Soviet Union.

The Soviet Union was able to generate rapid growth even under
extractive institutions because the Bolsheviks built a powerful
centralized state and used it to allocate resources toward industry.
But as in all instances of growth under extractive institutions, this
experience did not feature technological change and was not
sustained. Growth first slowed down and then totally collapsed.
Though ephemeral, this type of growth still illustrates how extractive
institutions can stimulate economic activity.

Throughout history most societies have been ruled by extractive
institutions, and those that have managed to impose some extent of
order over the countries have been able to generate some limited
growth — even if none of these extractive societies have managed to
achieve sustained growth. In fact, some of the major turning points in
history are characterized by institutional innovations that cemented
extractive institutions and increased the authority of one group to
impose law and order and benefit from extraction. In the rest of this
chapter, we will first discuss the nature of institutional innovations
that establish some degree of state centralization and enable growth
under extractive institutions. We shall then show how these ideas
help us understand the Neolithic Revolution, the momentous

transition to agriculture, which underpins many aspects of our
current civilization. We will conclude by illustrating, with the
example of the Maya city-states, how growth under extractive
institutions is limited not only because of lack of technological
progress but also because it will encourage infighting from rival
groups wishing to take control of the state and the extraction it
generates.

On the Banks of the Kasai

One of the great tributaries of the River Congo is the Kasai. Rising in
Angola, it heads north and merges with the Congo northeast of
Kinshasa, the capital of the modern Democratic Republic of Congo.
Though the Democratic Republic of Congo is poor compared with the
rest of the world, there have always been significant differences in the
prosperity of various groups within Congo. The Kasai is the boundary
between two of these. Soon after passing into Congo along the
western bank, you’ll find the Lele people; on the eastern bank are the
Bushong (Map 6, this page). On the face of it there ought to be few
differences between these two groups with regard to their prosperity.
They are separated only by a river, which either can cross by boat.
The two different tribes have a common origin and related languages.
In addition, many of the things they build are similar in style,
including their houses, clothes, and crafts.

Yet when the anthropologist Mary Douglas and the historian Jan
Vansina studied these groups in the 1950s, they discovered some
startling differences between them. As Douglas put it: “The Lele are
poor, while the Bushong are rich ... Everything that the Lele have or
can do, the Bushong have more and can do better.” Simple
explanations for this inequality are easy to come by. One difference,
reminiscent of that between places in Peru that were or were not
subject to the Potosi mita, is that the Lele produced for subsistence
while the Bushong produced for exchange in the market. Douglas and
Vansina also noted that the Lele used inferior technology. For
instance, they did not use nets for hunting, even though these greatly

improve productivity. Douglas argued, “[T]he absence of nets is
consistent with a general Lele tendency not to invest time and labor
in long-term equipment.”

There were also important distinctions in agricultural technologies
and organization. The Bushong practiced a sophisticated form of
mixed farming where five crops were planted in succession in a two-
year system of rotation. They grew yams, sweet potatoes, manioc
(cassava), and beans and gathered two and sometimes three maize
harvests a year. The Lele had no such system and managed to reap
only one annual harvest of maize.

There were also striking differences in law and order. The Lele
were dispersed into fortified villages, which were constantly in
conflict. Anyone traveling between two or even venturing into the
forest to collect food was liable to be attacked or kidnapped. In the
Bushong country, this rarely, if ever, happened.

What lay behind these differences in the patterns of production,
agricultural technology, and prevalence of order? Obviously it was
not geography that induced the Lele to use inferior hunting and
agricultural technology. It was certainly not ignorance, because they
knew about the tools used by the Bushong. An alternative explanation
might be culture; could it be that the Lele had a culture that did not
encourage them to invest in hunting nets and sturdier and better-built
houses? But this does not seem to have been true, either. As with the
people of Kongo, the Lele were very interested in purchasing guns,
and Douglas even remarked that “their eager purchase of
firearms ... shows their culture does not restrict them to inferior
techniques when these do not require long-term collaboration and
effort.” So neither a cultural aversion to technology nor ignorance nor
geography does a good job of explaining the greater prosperity of the
Bushong relative to the Lele.

The reason for differences between these two peoples lies in the
different political institutions that emerged in the lands of the
Bushong and the Lele. We noted earlier that the Lele lived in fortified
villages that were not part of a unified political structure. It was
different on the other side of the Kasai. Around 1620 a political

revolution took place led by a man called Shyaam, who forged the
Kuba Kingdom, which we saw on Map 6, with the Bushong at its
heart and with himself as king. Prior to this period, there were
probably few differences between the Bushong and the Lele; the
differences emerged as a consequence of the way Shyaam reorganized
society to the east of the river. He built a state and a pyramid of
political institutions. These were not just significantly more
centralized than what came before but also involved highly elaborate
structures. Shyaam and his successors created a bureaucracy to raise
taxes and a legal system and police force to administer the law.
Leaders were checked by councils, which they had to consult with
before making decisions. There was even trial by jury, an apparently
unique event in sub-Saharan Africa prior to European colonialism.
Nevertheless, the centralized state that Shyaam constructed was a tool
of extraction and highly absolutist. Nobody voted for him, and state
policy was dictated from the top, not by popular participation.

This political revolution introducing state centralization and law
and order in the Kuba country in turn led to an economic revolution.
Agriculture was reorganized and new technologies were adopted to
increase productivity. The crops that had previously been the staples
were replaced by new, higher-yield ones from the Americas (in
particular, maize, cassava, and chili peppers). The intense mixed-
farming cycle was introduced at this time, and the amount of food
produced per capita doubled. To adopt these crops and reorganize the
agricultural cycle, more hands were needed in the fields. So the age of
marriage was lowered to twenty, which brought men into the
agricultural labor force at a younger age. The contrast with the Lele is
stark. Their men tended to marry at thirty-five and only then worked
in the fields. Until then, they dedicated their lives to fighting and
raiding.

The connection between the political and economic revolution was
simple. King Shyaam and those who supported him wanted to extract
taxes and wealth from the Kuba, who had to produce a surplus above
what they consumed themselves. While Shyaam and his men did not
introduce inclusive institutions to the eastern bank of the Kasai, some

amount of economic prosperity is intrinsic to extractive institutions
that achieve some degree of state centralization and impose law and
order. Encouraging economic activity was of course in the interest of
Shyaam and his men, as otherwise there would have been nothing to
extract. Just like Stalin, Shyaam created by command a set of
institutions that would generate the wealth necessary to support this
system. Compared to the utter absence of law and order that reigned
on the other bank of the Kasai, this generated significant economic
prosperity — even if much of it was likely extracted by Shyaam and his
elites. But it was necessarily limited. Just as in the Soviet Union, there
was no creative destruction in the Kuba Kingdom and no
technological innovation after this initial change. This situation was
more or less unaltered by the time the kingdom was first encountered
by Belgian colonial officials in the late nineteenth century.

King Shyaam’s achievement illustrates how some limited degree of
economic success can be achieved through extractive institutions.
Creating such growth requires a centralized state. To centralize the
state, a political revolution is often necessary. Once Shyaam created
this state, he could use its power to reorganize the economy and
boost agricultural productivity, which he could then tax.

Why was it that the Bushong, and not the Lele, had a political
revolution? Couldn’t the Lele have had their own King Shyaam? What
Shyaam accomplished was an institutional innovation not tied in any
deterministic way to geography, culture, or ignorance. The Lele could
have had such a revolution and similarly transformed their
institutions, but they didn’t. Perhaps this is for reasons that we do not
understand, because of our limited knowledge of their society today.
Most likely it is because of the contingent nature of history. The same
contingency was probably at work when some of the societies in the
Middle East twelve thousand years ago embarked upon an even more
radical set of institutional innovations leading to settled societies and
then to the domestication of plants and animals, as we discuss next.

The Long Summer

About 15,000 bc, the Ice Age came to an end as the Earth’s climate
warmed up. Evidence from the Greenland ice cores suggests that
average temperatures rose by as much as fifteen degrees Celsius in a
short span of time. This warming seems to have coincided with rapid
increases in human populations as the global warming led to
expanding animal populations and much greater availability of wild
plants and foods. This process was put into rapid reverse at about
14,000 bc, by a period of cooling known as the Younger Dry as, but
after 9600 bc, global temperatures rose again, by seven degrees
Celsius in less than a decade, and have since stayed high.
Archaeologist Brian Fagan calls it the Long Summer. The warming-up
of the climate was a huge critical juncture that formed the
background to the Neolithic Revolution, where human societies made
the transition to sedentary life, farming, and herding. This and the
rest of subsequent human history have played out basking in this
Long Summer.

There is a fundamental difference between farming and herding
and hunting-gathering. The former is based on the domestication of
plant and animal species, with active intervention in their life cycles
to change genetics to make those species more useful to humans.
Domestication is a technological change that enables humans to
produce a lot more food from the available plants and animals. The
domestication of maize, for example, began when humans gathered
teosinte, the wild crop that was maize’s ancestor. Teosinte cobs are
very small, barely a few centimeters long. They are dwarfed by a cob
of modern maize. Yet gradually, by selecting the larger ears of
teosinte, and plants whose ears did not break but stayed on the stalk
to be harvested, humans created modern maize, a crop that provides
far more nourishment from the same piece of land.

The earliest evidence of farming, herding, and the domestication of
plants and animals comes from the Middle East, in particular from the
area known as the Hilly Flanks, which stretches from the south of
modern-day Israel, up through Palestine and the west bank of the

River Jordan, via Syria and into southeastern Turkey, northern Iraq,
and western Iran. Around 9500 bc the first domestic plants, emmer
and two-row barley, were found in Jericho on the west bank of the
River Jordan in Palestine; and emmer, peas, and lentils, at Tell
Aswad, farther north in Syria. Both were sites of the so-called
Natufian culture and both supported large villages; the village of
Jericho had a population of possibly five hundred people by this time.

Why did the first farming villages happen here and not elsewhere?
Why was it the Natufians, and not other peoples, who domesticated
peas and lentils? Were they lucky and just happened to be living
where there were many potential candidates for domestication? While
this is true, many other people were living among these species, but
they did not domesticate them. As we saw in chapter 2 in Maps 4 and
5, research by geneticists and archaeologists to pin down the
distribution of the wild ancestors of modern domesticated animals
and plants reveals that many of these ancestors were spread over very
large areas, millions of square kilometers. The wild ancestors of
domesticated animal species were spread throughout Eurasia. Though
the Hilly Flanks were particularly well endowed in terms of wild crop
species, even they were very far from unique. It was not that the
Natufians lived in an area uniquely endowed with wild species that
made them special. It was that they were sedentary before they
started domesticating plants or animals. One piece of evidence comes
from gazelle teeth, which are composed of cementum, a bony
connective tissue that grows in layers. During the spring and summer,
when cementum’s growth is most rapid, the layers are a different
color from the layers that form in the winter. By taking a slice
through a tooth you can see the color of the last layer created before
the gazelle died. Using this technique, you can determine if the
gazelle was killed in summer or winter. At Natufian sites, one finds
gazelles killed in all seasons, suggesting year-round residence. The
village of Abu Hureyra, on the river Euphrates, is one of the most
intensively researched Natufian settlements. For almost forty years
archaeologists have examined the layers of the village, which
provides one of the best documented examples of sedentary life

before and after the transition to farming. The settlement probably
began around 9500 bc, and the inhabitants continued their hunter-
gatherer lifestyle for another five hundred years before switching to
agriculture. Archaeologists estimate that the population of the village
prior to farming was between one hundred and three hundred.

You can think of all sorts of reasons why a society might find it
advantageous to become sedentary. Moving about is costly; children
and old people have to be carried, and it is impossible to store food
for lean times when you are on the move. Moreover, tools such as
grinding stones and sickles were useful for processing wild foods, but
are heavy to carry. There is evidence that even mobile hunter-
gatherers stored food in select locations such as caves. One attraction
of maize is that it stores very well, and this is a key reason why it
became so intensively cultivated throughout the Americas. The ability
to deal more effectively with storage and accumulate food stocks
must have been a key incentive for adopting a sedentary way of life.

While it might be collectively desirable to become sedentary, this
doesn’t mean that it will necessarily happen. A mobile group of
hunter-gatherers would have to agree to do this, or someone would
have to force them. Some archaeologists have suggested that
increasing population density and declining living standards were key
factors in the emergence of sedentary life, forcing mobile people to
stay in one place. Yet the density of Natufian sites is no greater than
that of previous groups, so there does not appear to be evidence of
increasing population density. Skeletal and dental evidence does not
suggest deteriorating health, either. For instance, food shortage tends
to create thin lines in people’s tooth enamel, a condition called
hypoplasia. These lines are in fact less prevalent in Natufian people
than in later farming people.

More important is that while sedentary life had pluses, it also had
minuses. Conflict resolution was probably much harder for sedentary
groups, since disagreements could be resolved less easily by people or
groups merely moving away. Once people had built permanent
buildings and had more assets than they could carry, moving away
was a much less attractive option. So villages needed more effective

ways of resolving conflict and more elaborate notions of property.
Decisions would have to be made about who had access to which
piece of land close to the village, or who got to pick fruit from which
stand of trees and fish in which part of the stream. Rules had to be
developed, and the institutions that made and enforced rules had to
be elaborated.

In order for sedentary life to emerge, it therefore seems plausible
that hunter-gatherers would have had to be forced to settle down, and
this would have to have been preceded by an institutional innovation
concentrating power in the hands of a group that would become the
political elite, enforce property rights, maintain order, and also
benefit from their status by extracting resources from the rest of
society. In fact, a political revolution similar to that initiated by King
Shyaam, even if on a smaller scale, is likely to have been the
breakthrough that led to sedentary life.

The archaeological evidence indeed suggests that the Natufians
developed a complex society characterized by hierarchy, order, and
inequality — beginnings of what we would recognize as extractive
institutions — a long time before they became farmers. One compelling
piece of evidence for such hierarchy and inequality comes from
Natufian graves. Some people were buried with large amounts of
obsidian and dentalium shells, which came from the Mediterranean
coast near Mount Carmel. Other types of ornamentation include
necklaces, garters, and bracelets, which were made out of canine
teeth and deer phalanges as well as shells. Other people were buried
without any of these things. Shells and also obsidian were traded, and
control of this trade was quite likely a source of power accumulation
and inequality. Further evidence of economic and political inequality
comes from the Natufian site of Ain Mallaha, just north of the Sea of
Galilee. Amid a group of about fifty round huts and many pits, clearly
used for storage, there is a large, intensively plastered building close
to a cleared central place. This building was almost certainly the
house of a chief. Among the burials at the site, some are much more
elaborate, and there is also evidence of a skull cult, possibly
indicating ancestor worship. Such cults are widespread in Natufian

sites, particularly Jericho. The preponderance of evidence from
Natufian sites suggests that these were probably already societies
with elaborate institutions determining inheritance of elite status.
They engaged in trade with distant places and had nascent forms of
religion and political hierarchies.

The emergence of political elites most likely created the transition
first to sedentary life and then to farming. As the Natufian sites show,
sedentary life did not necessarily mean farming and herding. People
could settle down but still make their living by hunting and
gathering. After all, the Long Summer made wild crops more
bountiful, and hunting and gathering was likely to have been more
attractive. Most people may have been quite satisfied with a
subsistence life based on hunting and gathering that did not require a
lot of effort. Even technological innovation doesn’t necessarily lead to
increased agricultural production. In fact, it is known that a major
technological innovation, the introduction of the steel axe among the
group of Australian Aboriginal peoples known as Yir Yoront, led not
to more intense production but to more sleeping, because it allowed
subsistence requirements to be met more easily, with little incentive
to work for more.

The traditional, geography-based explanation for the Neolithic
Revolution — the centerpiece of Jared Diamond’s argument, which we
discussed in chapter 2 — is that it was driven by the fortuitous
availability of many plant and animal species that could easily be
domesticated. This made farming and herding attractive and induced
sedentary life. After societies became sedentary and started farming,
they began to develop political hierarchy, religion, and significantly
more complex institutions. Though widely accepted, the evidence
from the Natufians suggests that this traditional explanation puts the
cart before the horse. Institutional changes occurred in societies quite
a while before they made the transition to farming and were probably
the cause both of the move to sedentarism, which reinforced the
institutional changes, and subsequently of the Neolithic Revolution.
This pattern is suggested not only by the evidence from the Hilly
Flanks, which is the area most intensively studied, but also by the

preponderance of evidence from the Americas, sub-Saharan Africa,
and East Asia.

Certainly the transition to farming led to greater agricultural
productivity and enabled a significant expansion of population. For
instance, in sites such as Jericho and Abu Hureyra, one sees that the
early farming village was much larger than the prefarming one. In
general, villages grew by between two and six times when the
transition took place. Moreover, many of the consequences that
people have traditionally argued as having flowed from this transition
undoubtedly happened. There was greater occupational specialization
and more rapid technological progress, and probably the development
of more complex and possibly less egalitarian political institutions.
But whether this happened in a particular place was not determined
by the availability of plant and animal species. Instead, it was a
consequence of the society’s having experienced the types of
institutional, social, and political innovations that would have
allowed sedentary life and then farming to emerge.

Though the Long Summer and the presence of crop and animal
species allowed this to happen, it did not determine where or when
exactly, after the climate had warmed up, it would happen. Rather,
this was determined by the interaction of a critical juncture, the Long
Summer, with small but important institutional differences that
mattered. As the climate warmed up, some societies, such as the
Natufians, developed elements of centralized institutions and
hierarchy, though these were on a very small scale relative to those of
modern nation-states. Like the Bushong under Shyaam, societies
reorganized to take advantage of the greater opportunities created by
the glut of wild plants and animals, and it was no doubt the political
elites who were the main beneficiaries of these new opportunities and
of the political centralization process. Other places that had only
slightly different institutions did not permit their political elites to
take similar advantage of this juncture and lagged behind the process
of political centralization and the creation of settled, agricultural, and
more complex societies. This paved the way to a subsequent
divergence of exactly the type we have seen before. Once these

differences emerged, they spread to some places but not to others. For
example, farming spread into Europe from the Middle East starting
around 6500 bc, mostly as a consequence of the migration of farmers.
In Europe, institutions drifted away from parts of the world, such as
Africa, where initial institutions had been different and where the
innovations set in motion by the Long Summer in the Middle East
happened only much later, and even then in a different form.

The institutional innovations of the Natufians, though they did most
likely underpin the Neolithic Revolution, did not leave a simple
legacy in world history and did not lead inexorably to the long-run
prosperity of their homelands in modern Israel, Palestine, and Syria.
Syria and Palestine are relatively poor parts of the modern world, and
the prosperity of Israel was largely imported by the settlement of
Jewish people after the Second World War and their high levels of
education and easy access to advanced technologies. The early
growth of the Natufians did not become sustained for the same reason
that Soviet growth fizzled out. Though highly significant, even
revolutionary for its time, this was growth under extractive
institutions. For the Natufian society it was also likely that this type
of growth created deep conflicts over who would control institutions
and the extraction they enabled. For every elite benefiting from
extraction there is a non-elite who would love to replace him.
Sometimes infighting simply replaces one elite with another.
Sometimes it destroys the whole extractive society, unleashing a
process of state and societal collapse, as the spectacular civilization
that Maya city-states built more than one thousand years ago
experienced.

The Unstable Extraction

Farming emerged independently in several places around the world.
In what is now modern Mexico, societies formed that established
states and settlements, and transitioned to agriculture. As with the

Natufians in the Middle East, they also achieved some degree of
economic growth. The Maya city-states in the area of southern
Mexico, Belize, Guatemala, and Western Honduras in fact built a
fairly sophisticated civilization under their own brand of extractive
institutions. The Maya experience illustrates not only the possibility
of growth under extractive institutions but also another fundamental
limit to this type of growth: the political instability that emerges and
ultimately leads to collapse of both society and state as different
groups and people fight to become the extractors.

Maya cities first began to develop around 500 bc. These early cities
eventually failed, sometime in the first century ad. A new political
model then emerged, creating the foundation for the Classic Era,
between ad 250 and 900. This period marked the full flowering of
Maya culture and civilization. But this more sophisticated civilization
would also collapse in the course of the next six hundred years. By
the time the Spanish conquistadors arrived in the early sixteenth
century, the great temples and palaces of such Maya sites as Tikal,
Palenque, and Calakmul had receded into the forest, not to be
rediscovered until the nineteenth century.

The Maya cities never unified into an empire, though some cities
were subservient to others, and they often appear to have cooperated,
particularly in warfare. The main connection between the region’s
city-states, fifty of which we can recognize by their own glyphs, is
that their people spoke around thirty-one different but closely related
Mayan languages. The Mayas developed a writing system, and there
are at least fifteen thousand remaining inscriptions describing many
aspects of elite life, culture, and religion. They also had a
sophisticated calendar for recording dates known as the Long Count.
It was very much like our own calendar in that it counted the
unfolding of years from a fixed date and was used by all Maya cities.
The Long Count began in 3114 bc, though we do not know what
significance the Mayas attached to this date, which long precedes the
emergence of anything resembling Maya society.

The Mayas were skilled builders who independently invented
cement. Their buildings and their inscriptions provide vital

information on the trajectories of the Maya cities, as they often
recorded events dated according to the Long Count. Looking across all
the Maya cities, archaeologists can thus count how many buildings
were finished in particular years. Around ad 500 there are few dated
monuments. For example, the Long Count date corresponding to ad
514 recorded just ten. There was then a steady increase, reaching
twenty by ad 672 and forty by the middle of the eighth century. After
this the number of dated monuments collapses. By the ninth century,
it is down to ten per year, and by the tenth century, to zero. These
dated inscriptions give us a clear picture of the expansion of Maya
cities and their subsequent contraction from the late eighth century.

This analysis of dates can be complemented by examining the lists
of kings the Mayas recorded. At the Maya city of Copan, now in
western Honduras, there is a famous monument known as Altar Q.
Altar Q records the names of all the kings, starting from the founder
of the dynasty K’inich Yax K’uk’ Mo’, or “King Green-Sun First
Quetzal Macaw,” named after not just the sun but also two of the
exotic birds of the Central American forest whose feathers were
greatly valued by the Mayas. K’inich Yax K’uk’ Mo’ came to power in
Copan in ad 426, which we know from the Long Count date on Altar
Q. He founded a dynasty that would reign for four hundred years.
Some of K’inich Yax’s successors had equally graphic names. The
thirteenth ruler’s glyph translates as “18 Rabbit,” who was followed
by “Smoke Monkey” and then “Smoke Shell,” who died in ad 763. The
last name on the altar is King Yax Pasaj Chan Yoaat, or “First Dawned
Sky Lightening God,” who was the sixteenth ruler of this line and
assumed the throne at the death of Smoke Shell. After him we know
of only one more king, Ukit Took (“Patron of Flint”), from a fragment
of an altar. After Yax Pasaj, the buildings and inscriptions stopped,
and it seems that the dynasty was shortly overthrown. Ukit Took was
probably not even the real claimant to the throne but a pretender.

There is a final way of looking at this evidence at Copan, one
developed by the archaeologists AnnCorinne Freter, Nancy Gonlin,
and David Webster. These researchers mapped the rise and fall of
Copan by examining the spread of the settlement in the Copan Valley

over a period of 850 years, from ad 400 to ad 1250, using a technique
called obsidian hydration, which calculates the water content of
obsidian on the date it was mined. Once mined, the water content
falls at a known rate, allowing archaeologists to calculate the date a
piece of obsidian was mined. Freter, Gonlin, and Webster were then
able to map where pieces of dated obsidian were found in the Copan
Valley and trace how the city expanded and then contracted. Since it
is possible to make a reasonable guess about the number of houses
and buildings in a particular area, the total population of the city can
be estimated. In the period ad 400-449, the population was
negligible, estimated at about six hundred people. It rose steadily to a
peak of twenty-eight thousand in ad 750-799. Though this does not
appear large by contemporary urban standards, it was massive for
that period; these numbers imply that in this period, Copan had a
larger population than London or Paris. Other Maya cities, such as
Tikal and Calakmul, were undoubtedly much larger. In line with the
evidence from the Long Count dates, ad 800 was the population peak
for Copan. After this it began to decline, and by ad 900 it had fallen to
around fifteen thousand people. From there the fall continued, and by
ad 1200 the population had returned to what it was eight hundred
years previously.

The basis for the economic development of the Maya Classical Era
was the same as that for the Bushong and the Natufians: the creation
of extractive institutions with some degree of state centralization.
These institutions had several key elements. Around ad 100, in the
city of Tikal in Guatemala, there emerged a new type of dynastic
kingdom. A ruling class based on the ajaw (lord or ruler) took root
with a king called the k’uhul ajaw (divine lord) and, underneath him,
a hierarchy of aristocrats. The divine lord organized the society with
the cooperation of these elites and also communicated with the gods.
As far as we know, this new set of political institutions did not allow
for any sort of popular participation, but it did bring stability. The
k’uhul ajaw raised tribute from farmers and organized labor to build
the great monuments, and the coalescence of these institutions
created the basis for an impressive economic expansion. The Maya’s

economy was based on extensive occupational specialization, with
skilled potters, weavers, woodworkers, and tool and ornament
makers. They also traded obsidian, jaguar pelts, marine shells, cacao,
salt, and feathers among themselves and other polities over long
distances in Mexico. They probably had money, too, and like the
Aztecs, used cacao beans for currency.

The way in which the Maya Classical Era was founded on the
creation of extractive political institutions was very similar to the
situation among the Bushong, with Yax Ehb’ Xook at Tikal playing a
role similar to that of King Shyaam. The new political institutions led
to a significant increase in economic prosperity, much of which was
then extracted by the new elite based around the k’uhul ajaw. Once
this system had consolidated, by around ad 300, there was little
further technological change, however. Though there is some
evidence of improved irrigation and water management techniques,
agricultural technology was rudimentary and appears not to have
changed. Building and artistic techniques became much more
sophisticated over time, but in total there was little innovation.

There was no creative destruction. But there were other forms of
destruction as the wealth that the extractive institutions created for
the k’uhul ajaw and the Maya elite led to constant warfare, which
worsened over time. The sequence of conflicts is recorded in the
Maya inscriptions, with special glyphs indicating that a war took
place at a particular date in the Long Count. The planet Venus was
the celestial patron of war, and the Mayas regarded some phases of
the planet’s orbit as particularly auspicious for waging war. The glyph
that indicated warfare, known as “star wars” by archaeologists, shows
a star showering the earth with a liquid that could be water or blood.
The inscriptions also reveal patterns of alliance and competition.
There were long contests for power between the larger states, such as
Tikal, Calakmul, Copan, and Palenque, and these subjugated smaller
states into a vassal status. Evidence for this comes from glyphs
marking royal accessions. During this period, they start indicating
that the smaller states were now being dominated by another, outside
ruler.

Map 10 (this page) shows the main Maya cities and the various
patterns of contact between them as reconstructed by the
archaeologists Nikolai Grube and Simon Martin. These patterns
indicate that though the large cities such as Calakmul, Dos Pilas,
Piedras Negras, and Yaxchilan had extensive diplomatic contacts,
some were often dominated by others and they also fought each
other.

The overwhelming fact about the Maya collapse is that it coincides
with the overthrow of the political model based on the k’uhul ajaw.
We saw in Copan that after Yax Pasaj’s death in ad 810 there were no
more kings. At around this time the royal palaces were abandoned.
Twenty miles to the north of Copan, in the city of Quirigua, the last
king, Jade Sky, ascended to the throne between ad 795 and 800. The
last dated monument is from ad 810 by the Long Count, the same year
that Yax Pasaj died. The city was abandoned soon after. Throughout
the Maya area the story is the same; the political institutions that had
provided the context for the expansion of trade, agriculture, and
population vanished. Royal courts did not function, monuments and
temples were not carved, and palaces were emptied. As political and
social institutions unraveled, reversing the process of state
centralization, the economy contracted and the population fell.

In some cases the major centers collapsed from widespread
violence. The Petexbatun region of Guatemala — where the great
temples were subsequently pulled down and the stone used to build
extensive defensive walls — provides one vivid example. As well see
in the next chapter, it was very similar to what happened in the later
Roman Empire. Later, even in places such as Copan, where there are
fewer signs of violence at the time of the collapse, many monuments
were defaced or destroyed. In some places the elite remained even
after the initial overthrow of the k’uhul ajaw. In Copan there is
evidence of the elite continuing to erect new buildings for at least
another two hundred years before they also disappeared. Elsewhere
elites seem to have gone at the same time as the divine lord.

F.*pl»»l hUtmni'fU of hn'rort hy
Diplomat* itmldi b
Conflicts

Map 10: The Maya city-states, and inter-city contacts and conflicts

Existing archaeological evidence does not allow us to reach a
definitive conclusion about why the k’uhul ajaw and elites
surrounding him were overthrown and the institutions that had
created the Maya Classical Era collapsed. We know this took place in
the context of intensified inter-city warfare, and it seems likely that
opposition and rebellion within the cities, perhaps led by different
factions of the elite, overthrew the institution.

Though the extractive institutions that the Mayas created produced
sufficient wealth for the cities to flourish and the elite to become
wealthy and generate great art and monumental buildings, the system
was not stable. The extractive institutions upon which this narrow
elite ruled created extensive inequality, and thus the potential for
infighting between those who could benefit from the wealth extracted
from the people. This conflict ultimately led to the undoing of the
Maya civilization.

What Goes Wrong?

Extractive institutions are so common in history because they have a
powerful logic: they can generate some limited prosperity while at
the same time distributing it into the hands of a small elite. For this
growth to happen, there must be political centralization. Once this is
in place, the state — or the elite controlling the state — typically has
incentives to invest and generate wealth, encourage others to invest
so that the state can extract resources from them, and even mimic
some of the processes that would normally be set in motion by
inclusive economic institutions and markets. In the Caribbean
plantation economies, extractive institutions took the form of the elite
using coercion to force slaves to produce sugar. In the Soviet Union,
they took the form of the Communist Party reallocating resources
from agriculture to industry and structuring some sort of incentives
for managers and workers. As we have seen, such incentives were
undermined by the nature of the system.

The potential for creating extractive growth gives an impetus to
political centralization and is the reason why King Shyaam wished to
create the Kuba Kingdom, and likely accounts for why the Natufians
in the Middle East set up a primitive form of law and order,
hierarchy, and extractive institutions that would ultimately lead to
the Neolithic Revolution. Similar processes also likely underpinned
the emergence of settled societies and the transition to agriculture in
the Americas, and can be seen in the sophisticated civilization that
the Mayas built on foundations laid by highly extractive institutions
coercing many for the benefit of their narrow elites.

The growth generated by extractive institutions is very different in
nature from growth created under inclusive institutions, however.
Most important, it is not sustainable. By their very nature, extractive
institutions do not foster creative destruction and generate at best
only a limited amount of technological progress. The growth they
engender thus lasts for only so long. The Soviet experience gives a
vivid illustration of this limit. Soviet Russia generated rapid growth as
it caught up rapidly with some of the advanced technologies in the

world, and resources were allocated out of the highly inefficient
agricultural sector and into industry. But ultimately the incentives
faced in every sector, from agriculture to industry, could not
stimulate technological progress. This took place in only a few
pockets where resources were being poured and where innovation
was strongly rewarded because of its role in the competition with the
West. Soviet growth, however rapid it was, was bound to be relatively
short lived, and it was already running out of steam by the 1970s.

Lack of creative destruction and innovation is not the only reason
why there are severe limits to growth under extractive institutions.
The history of the Maya city-states illustrates a more ominous and,
alas, more common end, again implied by the internal logic of
extractive institutions. As these institutions create significant gains for
the elite, there will be strong incentives for others to fight to replace
the current elite. Infighting and instability are thus inherent features
of extractive institutions, and they not only create further
inefficiencies but also often reverse any political centralization,
sometimes even leading to the total breakdown of law and order and
descent into chaos, as the Maya city-states experienced following
their relative success during their Classical Era.

Though inherently limited, growth under extractive institutions
may nonetheless appear spectacular when it’s in motion. Many in the
Soviet Union and many more in the Western world were awestruck by
Soviet growth in the 1920s, ’30s, ’40s, ’50s, ’60s, and even as late as
the ’70s, in the same way that they are mesmerized by the breakneck
pace of economic growth in China today. But as we will discuss in
greater detail in chapter 15, China under the rule of the Communist
Party is another example of society experiencing growth under
extractive institutions and is similarly unlikely to generate sustained
growth unless it undergoes a fundamental political transformation
toward inclusive political institutions.

6 .

DRIFTING APART

How Venice Became a Museum

The group of islands that form Venice lie at the far north of the Adriatic

Sea. In the Middle Ages, Venice was possibly the richest place in the
world, with the most advanced set of inclusive economic institutions
underpinned by nascent political inclusiveness. It gained its
independence in ad 810, at what turned out to be a fortuitous time.
The economy of Europe was recovering from the decline it had
suffered as the Roman Empire collapsed, and kings such as
Charlemagne were reconstituting strong central political power. This
led to stability, greater security, and an expansion of trade, which
Venice was in a unique position to take advantage of. It was a nation
of seafarers, placed right in the middle of the Mediterranean. From
the East came spices, Byzantine-manufactured goods, and slaves.
Venice became rich. By 1050, when Venice had already been
expanding economically for at least a century, it had a population of
45,000 people. This increased by more than 50 percent, to 70,000, by
1200. By 1330 the population had again increased by another 50
percent, to 110,000; Venice was then as big as Paris, and probably
three times the size of London.

One of the key bases for the economic expansion of Venice was a
series of contractual innovations making economic institutions much
more inclusive. The most famous was the commenda, a rudimentary
type of joint stock company, which formed only for the duration of a
single trading mission. A commenda involved two partners, a
“sedentary” one who stayed in Venice and one who traveled. The
sedentary partner put capital into the venture, while the traveling

partner accompanied the cargo. Typically, the sedentary partner put
in the lion’s share of the capital. Young entrepreneurs who did not
have wealth themselves could then get into the trading business by
traveling with the merchandise. It was a key channel of upward social
mobility. Any losses in the voyage were shared according to the
amount of capital the partners had put in. If the voyage made money,
profits were based on two types of commenda contracts. If the
commenda was unilateral, then the sedentary merchant provided 100
percent of the capital and received 75 percent of the profits. If it was
bilateral, the sedentary merchant provided 67 percent of the capital
and received 50 percent of the profits. Studying official documents,
one sees how powerful a force the commenda was in fostering upward
social mobility: these documents are full of new names, people who
had previously not been among the Venetian elite. In government
documents of ad 960, 971, and 982, the number of new names
comprise 69 percent, 81 percent, and 65 percent, respectively, of
those recorded.

This economic inclusiveness and the rise of new families through
trade forced the political system to become even more open. The
doge, who governed Venice, was selected for life by the General
Assembly. Though a general gathering of all citizens, in practice the
General Assembly was dominated by a core group of powerful
families. Though the doge was very powerful, his power was
gradually reduced over time by changes in political institutions. After
1032 the doge was elected along with a newly created Ducal Council,
whose job was also to ensure that the doge did not acquire absolute
power. The first doge hemmed in by this council, Domenico
Flabianico, was a wealthy silk merchant from a family that had not
previously held high office. This institutional change was followed by
a huge expansion of Venetian mercantile and naval power. In 1082
Venice was granted extensive trade privileges in Constantinople, and
a Venetian Quarter was created in that city. It soon housed ten
thousand Venetians. Here we see inclusive economic and political
institutions beginning to work in tandem.

The economic expansion of Venice, which created more pressure

for political change, exploded after the changes in political and
economic institutions that followed the murder of the doge in 1171.
The first important innovation was the creation of a Great Council,
which was to be the ultimate source of political power in Venice from
this point on. The council was made up of officeholders of the
Venetian state, such as judges, and was dominated by aristocrats. In
addition to these officeholders, each year a hundred new members
were nominated to the council by a nominating committee whose
four members were chosen by lot from the existing council. The
council also subsequently chose the members for two subcouncils, the
Senate and the Council of Forty, which had various legislative and
executive tasks. The Great Council also chose the Ducal Council,
which was expanded from two to six members. The second innovation
was the creation of yet another council, chosen by the Great Council
by lot, to nominate the doge. Though the choice had to be ratified by
the General Assembly, since they nominated only one person, this
effectively gave the choice of doge to the council. The third
innovation was that a new doge had to swear an oath of office that
circumscribed ducal power. Over time these constraints were
continually expanded so that subsequent doges had to obey
magistrates, then have all their decisions approved by the Ducal
Council. The Ducal Council also took on the role of ensuring that the
doge obeyed all decisions of the Great Council.

These political reforms led to a further series of institutional
innovations: in law, the creation of independent magistrates, courts, a
court of appeals, and new private contract and bankruptcy laws.
These new Venetian economic institutions allowed the creation of
new legal business forms and new types of contracts. There was rapid
financial innovation, and we see the beginnings of modern banking
around this time in Venice. The dynamic moving Venice toward fully
inclusive institutions looked unstoppable.

But there was a tension in all this. Economic growth supported by
the inclusive Venetian institutions was accompanied by creative
destruction. Each new wave of enterprising young men who became
rich via the commenda or other similar economic institutions tended

to reduce the profits and economic success of established elites. And
they did not just reduce their profits; they also challenged their
political power. Thus there was always a temptation, if they could get
away with it, for the existing elites sitting in the Great Council to
close down the system to these new people.

At the Great Council’s inception, membership was determined each
year. As we saw, at the end of the year, four electors were randomly
chosen to nominate a hundred members for the next year, who were
automatically selected. On October 3, 1286, a proposal was made to
the Great Council that the rules be amended so that nominations had
to be confirmed by a majority in the Council of Forty, which was
tightly controlled by elite families. This would have given this elite
veto power over new nominations to the council, something they
previously had not had. The proposal was defeated. On October 5,
1286, another proposal was put forth; this time it passed. From then
on there was to be automatic confirmation of a person if his fathers
and grandfathers had served on the council. Otherwise, confirmation
was required by the Ducal Council. On October 17 another change in
the rules was passed stipulating that an appointment to the Great
Council must be approved by the Council of Forty, the doge, and the
Ducal Council.

The debates and constitutional amendments of 1286 presaged La
Serrata (“The Closure”) of Venice. In February 1297, it was decided
that if you had been a member of the Great Council in the previous
four years, you received automatic nomination and approval. New
nominations now had to be approved by the Council of Forty, but
with only twelve votes. After September 11, 1298, current members
and their families no longer needed confirmation. The Great Council
was now effectively sealed to outsiders, and the initial incumbents
had become a hereditary aristocracy. The seal on this came in 1315,
with the Libro d’Oro, or “Gold Book,” which was an official registry of
the Venetian nobility.

Those outside this nascent nobility did not let their powers erode
without a struggle. Political tensions mounted steadily in Venice
between 1297 and 1315. The Great Council partially responded by

making itself bigger. In an attempt to co-opt its most vocal opponents,
it grew from 450 to 1,500. This expansion was complemented by
repression. A police force was introduced for the first time in 1310,
and there was a steady growth in domestic coercion, undoubtedly as a
way of solidifying the new political order.

Having implemented a political Serrata, the Great Council then
moved to adopt an economic Serrata. The switch toward extractive
political institutions was now being followed by a move toward
extractive economic institutions. Most important, they banned the use
of commenda contracts, one of the great institutional innovations that
had made Venice rich. This shouldn’t be a surprise: the commenda
benefited new merchants, and now the established elite was trying to
exclude them. This was just one step toward more extractive
economic institutions. Another step came when, starting in 1314, the
Venetian state began to take over and nationalize trade. It organized
state galleys to engage in trade and, from 1324 on, began to charge
individuals high levels of taxes if they wanted to engage in trade.
Long-distance trade became the preserve of the nobility. This was the
beginning of the end of Venetian prosperity. With the main lines of
business monopolized by the increasingly narrow elite, the decline
was under way. Venice appeared to have been on the brink of
becoming the world’s first inclusive society, but it fell to a coup.
Political and economic institutions became more extractive, and
Venice began to experience economic decline. By 1500 the population
had shrunk to one hundred thousand. Between 1650 and 1800, when
the population of Europe rapidly expanded, that of Venice contracted.

Today the only economy Venice has, apart from a bit of fishing, is
tourism. Instead of pioneering trade routes and economic institutions,
Venetians make pizza and ice cream and blow colored glass for
hordes of foreigners. The tourists come to see the pr e-Serrata wonders
of Venice, such as the Doge’s Palace and the lions of St. Mark’s
Cathedral, which were looted from Byzantium when Venice ruled the
Mediterranean. Venice went from economic powerhouse to museum.

In this chapter we focus on the historical development of institutions in
different parts of the world and explain why they evolved in different
ways. We saw in chapter 4 how the institutions of Western Europe
diverged from those in Eastern Europe and then how those of England
diverged from those in the rest of Western Europe. This was a
consequence of small institutional differences, mostly resulting from
institutional drift interacting with critical junctures. It might then be
tempting to think that these institutional differences are the tip of a
deep historical iceberg where under the waterline we find English and
European institutions inexorably drifting away from those elsewhere,
based on historical events dating back millennia. The rest, as they
say, is history.

Except that it isn’t, for two reasons. First, moves toward inclusive
institutions, as our account of Venice shows, can be reversed. Venice
became prosperous. But its political and economic institutions were
overthrown, and that prosperity went into reverse. Today Venice is
rich only because people who make their income elsewhere choose to
spend it there admiring the glory of its past. The fact that inclusive
institutions can go into reverse shows that there is no simple
cumulative process of institutional improvement.

Second, small institutional differences that play a crucial role
during critical junctures are by their nature ephemeral. Because they
are small, they can be reversed, then can reemerge and be reversed
again. We will see in this chapter that, in contrast with what one
would expect from the geography or culture theories, England, where
the decisive step toward inclusive institutions would take place in the
seventeenth century, was a backwater, not only in the millennia
following the Neolithic Revolution in the Middle East but also at the
beginning of the Middle Ages, following the fall of the Western
Roman Empire. The British Isles were marginal to the Roman Empire,
certainly of less importance than continental Western Europe, North
Africa, the Balkans, Constantinople, or the Middle East. When the
Western Roman Empire collapsed in the fifth century ad, Britain
suffered the most complete decline. But the political revolutions that
would ultimately bring the Industrial Revolution would take place not

in Italy, Turkey, or even western continental Europe, but in the
British Isles.

In understanding the path to England’s Industrial Revolution and
the countries that followed it, Rome’s legacy is nonetheless important
for several reasons. First, Rome, like Venice, underwent major early
institutional innovations. As in Venice, Rome’s initial economic
success was based on inclusive institutions — at least by the standards
of their time. As in Venice, these institutions became decidedly more
extractive over time. With Rome, this was a consequence of the
change from the Republic (510 bc-49 bc) to the Empire (49 bc-ad
476). Even though during the Republican period Rome built an
impressive empire, and long-distance trade and transport flourished,
much of the Roman economy was based on extraction. The transition
from republic to empire increased extraction and ultimately led to the
kind of infighting, instability, and collapse that we saw with the Maya
city-states.

Second and more important, we will see that Western Europe’s
subsequent institutional development, though it was not a direct
inheritance of Rome, was a consequence of critical junctures that
were common across the region in the wake of the collapse of the
Western Roman Empire. These critical junctures had little parallel in
other parts of the world, such as Africa, Asia, or the Americas, though
we will also show via the history of Ethiopia that when other places
did experience similar critical junctures, they sometimes reacted in
ways that were remarkably similar. Roman decline led to feudalism,
which, as a by-product, caused slavery to wither away, brought into
existence cities that were outside the sphere of influence of monarchs
and aristocrats, and in the process created a set of institutions where
the political powers of rulers were weakened. It was upon this feudal
foundation that the Black Death would create havoc and further
strengthen independent cities and peasants at the expense of
monarchs, aristocrats, and large landowners. And it was on this
canvas that the opportunities created by the Atlantic trade would play
out. Many parts of the world did not undergo these changes, and in
consequence drifted apart.

Roman Virtues ...

Roman plebeian tribune Tiberius Gracchus was clubbed to death in
133 bc by Roman senators and his body was thrown unceremoniously
into the Tiber. His murderers were aristocrats like Tiberius himself,
and the assassination was masterminded by his cousin Publius
Cornelius Scipio Nasica. Tiberius Gracchus had an impeccable
aristocratic pedigree as a descendant of some of the more illustrious
leaders of the Roman Republic, including Lucius Aemilius Paullus,
hero of the Illyrian and Second Punic wars, and Scipio Africanus, the
general who defeated Hannibal in the Second Punic War. Why had
the powerful senators of his day, even his cousin, turned against him?

The answer tells us much about the tensions in the Roman Republic
and the causes of its subsequent decline. What pitted Tiberius against
these powerful senators was his willingness to stand against them in a
crucial question of the day: the allocation of land and the rights of
plebeians, common Roman citizens.

By the time of Tiberius Gracchus, Rome was a well-established
republic. Its political institutions and the virtues of Roman citizen-
soldiers — as captured by Jacques-Louis David’s famous painting Oath
of the Horatii, which shows the sons swearing to their fathers that
they will defend the Roman Republic to their death — are still seen by
many historians as the foundation of the republic’s success. Roman
citizens created the republic by overthrowing their king, Lucius
Tarquinius Superbus, known as Tarquin the Proud, around 510 bc.
The republic cleverly designed political institutions with many
inclusive elements. It was governed by magistrates elected for a year.
That the office of magistrate was elected, annually, and held by
multiple people at the same time reduced the ability of any one
person to consolidate or exploit his power. The republic’s institutions
contained a system of checks and balances that distributed power
fairly widely. This was so even if not all citizens had equal
representation, as voting was indirect. There was also a large number
of slaves crucial for production in much of Italy, making up perhaps
one-third of the population. Slaves of course had no rights, let alone

political representation.

All the same, as in Venice, Roman political institutions had
pluralistic elements. The plebeians had their own assembly, which
could elect the plebeian tribune, who had the power to veto actions
by the magistrates, call the Plebeian Assembly, and propose
legislation. It was the plebeians who put Tiberius Gracchus in power
in 133 bc. Their power had been forged by “secession,” a form of
strike by plebeians, particularly soldiers, who would withdraw to a
hill outside the city and refuse to cooperate with the magistrates until
their complaints were dealt with. This threat was of course
particularly important during a time of war. It was supposedly during
such a secession in the fifth century bc that citizens gained the right to
elect their tribune and enact laws that would govern their
community. Their political and legal protection, even if limited by
our current standards, created economic opportunities for citizens and
some degree of inclusivity in economic institutions. As a result, trade
throughout the Mediterranean flourished under the Roman Republic.
Archaeological evidence suggests that while the majority of both
citizens and slaves lived not much above subsistence level, many
Romans, including some common citizens, achieved high incomes,
with access to public services such as a city sewage system and street
lighting.

Moreover, there is evidence that there was also some economic
growth under the Roman Republic. We can track the economic
fortunes of the Romans from shipwrecks. The empire the Romans
built was in a sense a web of port cities — from Athens, Antioch, and
Alexandria in the east; via Rome, Carthage, and Cadiz; all the way to
London in the far west. As Roman territories expanded, so did trade
and shipping, which can be traced from shipwrecks found by
archaeologists on the floor of the Mediterranean. These wrecks can be
dated in many ways. Often the ships carried amphorae full of wine or
olive oil, being transported from Italy to Gaul, or Spanish olive oil to
be sold or distributed for free in Rome. Amphorae, sealed vessels
made of clay, often contained information on who had made them
and when. Just near the river Tiber in Rome is a small hill, Monte

Testaccio, also known as Monte dei Cocci (“Pottery Mountain”), made
up of approximately fifty-three million amphorae. When the
amphorae were unloaded from ships, they were discarded, over the
centuries creating a huge hill.

Other goods on the ships and the ship itself can sometimes be dated
using radiocarbon dating, a powerful technique used by
archaeologists to date the age of organic remains. Plants create
energy by photosynthesis, which uses the energy from the sun to
convert carbon dioxide into sugars. As they do this, plants incorporate
a quantity of a naturally occurring radioisotope, carbon-14. After
plants die, the carbon- 14 deteriorates due to radioactive decay. When
archaeologists find a shipwreck, they can date the ship’s wood by
comparing the remaining carbon- 14 fraction in it to that expected
from atmospheric carbon- 14. This gives an estimate of when the tree
was cut down. Only about 20 shipwrecks have been dated to as long
ago as 500 bc. These were probably not Roman ships, and could well
have been Carthaginian, for example. But then the number of Roman
shipwrecks increases rapidly. Around the time of the birth of Christ,
they reached a peak of 180.

Shipwrecks are a powerful way of tracing the economic contours of
the Roman Republic, and they do show evidence of some economic
growth, but they have to be kept in perspective. Probably two-thirds
of the contents of the ships were the property of the Roman state,
taxes and tribute being brought back from the provinces to Rome, or
grain and olive oil from North Africa to be handed out free to the
citizens of the city. It is these fruits of extraction that mostly
constructed Monte Testaccio.

Another fascinating way to find evidence of economic growth is
from the Greenland Ice Core Project. As snowflakes fall, they pick up
small quantities of pollution in the atmosphere, particularly the
metals lead, silver, and copper. The snow freezes and piles up on top
of the snow that fell in previous years. This process has been going on
for millennia, and provides an unrivaled opportunity for scientists to
understand the extent of atmospheric pollution thousands of years
ago. In 1990-1992 the Greenland Ice Core Project drilled down

through 3,030 meters of ice covering about 250,000 years of human
history. One of the major findings of this project, and others
preceding it, was that there was a distinct increase in atmospheric
pollutants starting around 500 bc. Atmospheric quantities of lead,
silver, and copper then increased steadily, reaching a peak in the first
century ad. Remarkably, this atmospheric quantity of lead is reached
again only in the thirteenth century. These findings show how
intense, compared with what came before and after, Roman mining
was. This upsurge in mining clearly indicates economic expansion.

But Roman growth was unsustainable, occurring under institutions
that were partially inclusive and partially extractive. Though Roman
citizens had political and economic rights, slavery was widespread
and very extractive, and the elite, the senatorial class, dominated
both the economy and politics. Despite the presence of the Plebeian
Assembly and plebeian tribute, for example, real power rested with
the Senate, whose members came from the large landowners
constituting the senatorial class. According to the Roman historian
Livy, the Senate was created by Rome’s first king, Romulus, and
consisted of one hundred men. Their descendants made up the
senatorial class, though new blood was also added. The distribution of
land was very unequal and most likely became more so by the second
century bc. This was at the root of the problems that Tiberius
Gracchus brought to the fore as tribune.

As its expansion throughout the Mediterranean continued, Rome
experienced an influx of great riches. But this bounty was captured
mostly by a few wealthy families of senatorial rank, and inequality
between rich and poor increased. Senators owed their wealth not only
to their control of the lucrative provinces but also to their very large
estates throughout Italy. These estates were manned by gangs of
slaves, often captured in the wars that Rome fought. But where the
land for these estates came from was equally significant. Rome’s
armies during the Republic consisted of citizen-soldiers who were
small landowners, first in Rome and later in other parts of Italy.
Traditionally they fought in the army when necessary and then
returned to their plots. As Rome expanded and the campaigns got

longer, this model ceased to work. Soldiers were away from their
plots for years at a time, and many landholdings fell into disuse. The
soldiers’ families sometimes found themselves under mountains of
debt and on the brink of starvation. Many of the plots were therefore
gradually abandoned, and absorbed by the estates of the senators. As
the senatorial class got richer and richer, the large mass of landless
citizens gathered in Rome, often after being decommissioned from the
army. With no land to return to, they sought work in Rome. By the
late second century bc, the situation had reached a dangerous boiling
point, both because the gap between rich and poor had widened to
unprecedented levels and because there were hordes of discontented
citizens in Rome ready to rebel in response to these injustices and
turn against the Roman aristocracy. But political power rested with
the rich landowners of the senatorial class, who were the beneficiaries
of the changes that had gone on over the last two centuries. Most had
no intention of changing the system that had served them so well.

According to the Roman historian Plutarch, Tiberius Gracchus,
when traveling through Etruria, a region in what is now central Italy,
became aware of the hardship that families of citizen-soldiers were
suffering. Whether because of this experience or because of other
frictions with the powerful senators of his time, he would soon
embark upon a daring plan to change land allocation in Italy. He
stood for plebeian tribune in 133 bc, then used his office to propose
land reform: a commission would investigate whether public lands
were being illegally occupied and would redistribute land in excess of
the legal limit of three hundred acres to landless Roman citizens. The
three-hundred-acre limit was in fact part of an old law, though
ignored and not implemented for centuries. Tiberius Gracchus’s
proposal sent shockwaves through the senatorial class, who were able
to block implementation of his reforms for a while. When Tiberius
managed to use the power of the mob supporting him to remove
another tribune who threatened to veto his land reform, his proposed
commission was finally founded. The Senate, though, prevented
implementation by starving the commission of funds.

Things came to a head when Tiberius Gracchus claimed for his land

reform commission the funds left by the king of the Greek city
Pergamum to the Roman people. He also attempted to stand for
tribune a second time, partly because he was afraid of persecution by
the Senate after he stepped down. This gave the senators the pretext
to charge that Tiberius was trying to declare himself king. He and his
supporters were attacked, and many were killed. Tiberius Gracchus
himself was one of the first to fall, though his death would not solve
the problem, and others would attempt to reform the distribution of
land and other aspects of Roman economy and society. Many would
meet a similar fate. Tiberius Gracchus’s brother Gaius, for example,
was also murdered by landowners, after he took the mantle from his
brother.

These tensions would surface again periodically during the next
century — for example, leading to the “Social War” between 91 bc and
87 bc. The aggressive defender of the senatorial interests, Lucius
Cornelius Sulla, not only viciously suppressed the demands for change
but also severely curtailed the powers of the plebeian tribune. The
same issues would also be a central factor in the support that Julius
Caesar received from the people of Rome in his fight against the
Senate.

The political institutions forming the core of the Roman Republic
were overthrown by Julius Caesar in 49 bc when he moved his legion
across the Rubicon, the river separating the Roman provinces of
Cisalpine Gaul from Italy. Rome fell to Caesar, and another civil war
broke out. Though Caesar was victorious, he was murdered by
disgruntled senators, led by Brutus and Cassius, in 44 bc. The Roman
Republic would never be re-created. A new civil war broke out
between Caesar’s supporters, particularly Mark Anthony and
Octavian, and his foes. After Anthony and Octavian won, they fought
each other, until Octavian emerged triumphant in the battle of
Actium in 31 bc. By the following year, and for the next forty-five
years, Octavian, known after 28 bc as Augustus Caesar, ruled Rome
alone. Augustus created the Roman Empire, though he preferred the
title princep, a sort of “first among equals,” and called the regime the
Principate. Map 11 shows the Roman Empire at its greatest extent in

117 ad. It also includes the river Rubicon, which Caesar so fatefully
crossed.

It was this transition from republic to principate, and later naked
empire, that laid the seeds of the decline of Rome. The partially
inclusive political institutions, which had formed the basis for the
economic success, were gradually undermined. Even if the Roman
Republic created a tilted playing field in favor of the senatorial class
and other wealthy Romans, it was not an absolutist regime and had
never before concentrated so much power in one position. The
changes unleashed by Augustus, as with the Venetian Serrata, were at
first political but then would have significant economic consequences.
As a result of these changes, by the fifth century ad the Western
Roman Empire, as the West was called after it split from the East, had
declined economically and militarily, and was on the brink of
collapse.

... Roman Vices

Flavius Aetius was one of the larger-than-life characters of the late
Roman Empire, hailed as “the last of the Romans” by Edward Gibbon,
author of The Decline and Fall of the Roman Empire. Between ad 433
and 454, until he was murdered by the emperor Valentinian III,
Aetius, a general, was probably the most powerful person in the
Roman Empire. He shaped both domestic and foreign policy, and

fought a series of crucial battles against the barbarians, and also other
Romans in civil wars. He was unique among powerful generals
fighting in civil wars in not seeking the emperorship himself. Since
the end of the second century, civil war had become a fact of life in
the Roman Empire. Between the death of Marcus Aurelius in ad 180
until the collapse of the Western Roman Empire in ad 476, there was
hardly a decade that did not see a civil war or a palace coup against
an emperor. Few emperors died of natural causes or in battle. Most
were murdered by usurpers or their own troops.

Aetius’s career illustrates the changes from Roman Republic and
early Empire to the late Roman Empire. Not only did his involvement
in incessant civil wars and his power in every aspect of the empire’s
business contrast with the much more limited power of generals and
senators during earlier periods, but it also highlights how the fortunes
of Romans changed radically in the intervening centuries in other
ways.

By the late Roman Empire, the so-called barbarians who were
initially dominated and incorporated into Roman armies or used as
slaves now dominated many parts of the empire. As a young man,
Aetius had been held hostage by barbarians, first by the Goths under
Alaric and then by the Huns. Roman relations with these barbarians
are indicative of how things had changed since the Republic. Alaric
was both a ferocious enemy and an ally, so much so that in 405 he
was appointed one of the senior-most generals of the Roman army.
The arrangement was temporary, however. By 408, Alaric was
fighting against the Romans, invading Italy and sacking Rome.

The Huns were also both powerful foes and frequent allies of the
Romans. Though they, too, held Aetius hostage, they later fought
alongside him in a civil war. But the Huns did not stay long on one
side, and under Attila they fought a major battle against the Romans
in 451, just across the Rhine. This time defending the Romans were
the Goths, under Theodoric.

All of this did not stop Roman elites from trying to appease
barbarian commanders, often not to protect Roman territories but to
gain the upper hand in internal power struggles. For example, the

Vandals, under their king, Geiseric, ravaged large parts of the Iberian
Peninsula and then conquered the Roman bread baskets in North
Africa from 429 onward. The Roman response to this was to offer
Geiseric the emperor Valentinian Ill’s child daughter as a bride.
Geiseric was at the time married to the daughter of one of the leaders
of the Goths, but this does not seem to have stopped him. He annulled
his marriage under the pretext that his wife was trying to murder him
and sent her back to her family after mutilating her by cutting off
both her ears and her nose. Fortunately for the bride-to-be, because of
her young age she was kept in Italy and never consummated her
marriage to Geiseric. Later she would marry another powerful
general, Petronius Maximus, the mastermind of the murder of Aetius
by the emperor Valentinian III, who would himself shortly be
murdered in a plot hatched by Maximus. Maximus later declared
himself emperor, but his reign would be very short, ended by his
death during the major offensive by the Vandals under Geiseric
against Italy, which saw Rome fall and savagely plundered.

By the early fifth century, the barbarians were literally at the gate.
Some historians argue that it was a consequence of the more
formidable opponents the Romans faced during the late Empire. But
the success of the Goths, Huns, and Vandals against Rome was a
symptom, not the cause, of Rome’s decline. During the Republic,
Rome had dealt with much more organized and threatening
opponents, such as the Carthaginians. The decline of Rome had
causes very similar to those of the Maya city-states. Rome’s
increasingly extractive political and economic institutions generated
its demise because they caused infighting and civil war.

The origins of the decline go back at least to Augustus’s seizure of
power, which set in motion changes that made political institutions
much more extractive. These included changes in the structure of the
army, which made secession impossible, thus removing a crucial
element that ensured political representation for common Romans.
The emperor Tiberius, who followed Augustus in ad 14, abolished the

Plebeian Assembly and transferred its powers to the Senate. Instead of
a political voice, Roman citizens now had free handouts of wheat and,
subsequently, olive oil, wine, and pork, and were kept entertained by
circuses and gladiatorial contests. With Augustus’s reforms, emperors
began to rely not so much on the army made up of citizen-soldiers,
but on the Praetorian Guard, the elite group of professional soldiers
created by Augustus. The Guard itself would soon become an
important independent broker of who would become emperor, often
through not peaceful means but civil wars and intrigue. Augustus also
strengthened the aristocracy against common Roman citizens, and the
growing inequality that had underpinned the conflict between
Tiberius Gracchus and the aristocrats continued, perhaps even
strengthened.

The accumulation of power at the center made the property rights
of common Romans less secure. State lands also expanded with the
empire as a consequence of confiscation, and grew to as much as half
of the land in many parts of the empire. Property rights became
particularly unstable because of the concentration of power in the
hands of the emperor and his entourage. In a pattern not too different
from what happened in the Maya city-states, infighting to take control
of this powerful position increased. Civil wars became a regular
occurrence, even before the chaotic fifth century, when the
barbarians ruled supreme. For example, Septimius Severus seized
power from Didius Julianus, who had made himself emperor after the
murder of Pertinax in ad 193. Severus, the third emperor in the so-
called Year of the Five Emperors, then waged war against his rival
claimants, the generals Pescennius Niger and Clodius Albinus, who
were finally defeated in ad 194 and 197, respectively. Severus
confiscated all the property of his losing opponents in the ensuing
civil war. Though able rulers, such as Trajan (ad 98 to 117), Hadrian,
and Marcus Aurelius in the next century, could stanch decline, they
could not, or did not want to, address the fundamental institutional
problems. None of these men proposed abandoning the empire or re-
creating effective political institutions along the lines of the Roman
Republic. Marcus Aurelius, for all his successes, was followed by his

son Commodus, who was more like Caligula or Nero than his father.

The rising instability was evident from the layout and location of
towns and cities in the empire. By the third century ad every sizeable
city in the empire had a defensive wall. In many cases monuments
were plundered for stone, which was used in fortifications. In Gaul
before the Romans had arrived in 125 bc, it was usual to build
settlements on hilltops, since these were more easily defended. With
the initial arrival of Rome, settlements moved down to the plains. In
the third century, this trend was reversed.

Along with mounting political instability came changes in society
that moved economic institutions toward greater extraction. Though
citizenship was expanded to the extent that by ad 212 nearly all the
inhabitants of the empire were citizens, this change went along with
changes in status between citizens. Any sense that there might have
been of equality before the law deteriorated. For example, by the
reign of Hadrian (ad 117 to 138), there were clear differences in the
types of laws applied to different categories of Roman citizen. Just as
important, the role of citizens was completely different from how it
had been in the days of the Roman Republic, when they were able to
exercise some power over political and economic decisions through
the assemblies in Rome.

Slavery remained a constant throughout Rome, though there is
some controversy over whether the fraction of slaves in the
population actually declined over the centuries. Equally important, as
the empire developed, more and more agricultural workers were
reduced to semi-servile status and tied to the land. The status of these
servile “coloni” is extensively discussed in legal documents such as the
Codex Theodosianus and Codex Justinianus, and probably originated
during the reign of Diocletian (ad 284 to 305). The rights of landlords
over the coloni were progressively increased. The emperor
Constantine in 332 allowed landlords to chain a colonus whom they
suspected was trying to escape, and from ad 365, coloni were not
allowed to sell their own property without their landlord’s
permission.

Just as we can use shipwrecks and the Greenland ice cores to track

the economic expansion of Rome during earlier periods, we can use
them also to trace its decline. By ad 500 the peak of 180 ships was
reduced to 20. As Rome declined, Mediterranean trade collapsed, and
some scholars have even argued that it did not return to its Roman
height until the nineteenth century. The Greenland ice tells a similar
story. The Romans used silver for coins, and lead had many uses,
including for pipes and tableware. After peaking in the first century
ad, the deposits of lead, silver, and copper in the ice cores declined.

The experience of economic growth during the Roman Republic
was impressive, as were other examples of growth under extractive
institutions, such as the Soviet Union. But that growth was limited
and was not sustained, even when it is taken into account that it
occurred under partially inclusive institutions. Growth was based on
relatively high agricultural productivity, significant tribute from the
provinces, and long-distance trade, but it was not underpinned by
technological progress or creative destruction. The Romans inherited
some basic technologies, iron tools and weapons, literacy, plow
agriculture, and building techniques. Early on in the Republic, they
created others: cement masonry, pumps, and the water wheel. But
thereafter, technology was stagnant throughout the period of the
Roman Empire. In shipping, for instance, there was little change in
ship design or rigging, and the Romans never developed the stern
rudder, instead steering ships with oars. Water wheels spread very
slowly, so that water power never revolutionized the Roman
economy. Even such great achievements as aqueducts and city sewers
used existing technology, though the Romans perfected it. There
could be some economic growth without innovation, relying on
existing technology, but it was growth without creative destruction.
And it did not last. As property rights became more insecure and the
economic rights of citizens followed the decline of their political
rights, economic growth likewise declined.

A remarkable thing about new technologies in the Roman period is
that their creation and spread seem to have been driven by the state.
This is good news, until the government decides that it is not
interested in technological development — an all-too-common

occurrence due to the fear of creative destruction. The great Roman
writer Pliny the Elder relates the following story. During the reign of
the emperor Tiberius, a man invented unbreakable glass and went to
the emperor anticipating that he would get a great reward. He
demonstrated his invention, and Tiberius asked him if he had told
anyone else about it. When the man replied no, Tiberius had the man
dragged away and killed, “lest gold be reduced to the value of mud.”
There are two interesting things about this story. First, the man went
to Tiberius in the first place for a reward, rather than setting himself
up in business and making a profit by selling the glass. This shows the
role of the Roman government in controlling technology. Second,
Tiberius was happy to destroy the innovation because of the adverse
economic effects it would have had. This is the fear of the economic
effects of creative destruction.

There is also direct evidence from the period of the Empire of the
fear of the political consequences of creative destruction. Suetonius
tells how the emperor Vespasian, who ruled between ad 69 and 79,
was approached by a man who had invented a device for transporting
columns to the Capitol, the citadel of Rome, at a relatively small cost.
Columns were large, heavy, and very difficult to transport. Moving
them to Rome from the mines where they were made involved the
labor of thousands of people, at great expense to the government.
Vespasian did not kill the man, but he also refused to use the
innovation, declaring, “How will it be possible for me to feed the
populace?” Again an inventor came to the government. Perhaps this
was more natural than with the unbreakable glass, as the Roman
government was most heavily involved with column mining and
transportation. Again the innovation was turned down because of the
threat of creative destruction, not so much because of its economic
impact, but because of fear of political creative destruction. Vespasian
was concerned that unless he kept the people happy and under
control it would be politically destabilizing. The Roman plebeians had
to be kept busy and pliant, so it was good to have jobs to give them,
such as moving columns about. This complemented the bread and
circuses, which were also dispensed for free to keep the population

content. It is perhaps telling that both of these examples came soon
after the collapse of the Republic. The Roman emperors had far more
power to block change than the Roman rulers during the Republic.

Another important reason for the lack of technological innovation
was the prevalence of slavery. As the territories Romans controlled
expanded, vast numbers were enslaved, often being brought back to
Italy to work on large estates. Many citizens in Rome did not need to
work: they lived off the handouts from the government. Where was
innovation to come from? We have argued that innovation comes
from new people with new ideas, developing new solutions to old
problems. In Rome the people doing the producing were slaves and,
later, semi-servile coloni with few incentives to innovate, since it was
their masters, not they, who stood to benefit from any innovation. As
we will see many times in this book, economies based on the
repression of labor and systems such as slavery and serfdom are
notoriously noninnovative. This is true from the ancient world to the
modern era. In the United States, for example, the northern states
took part in the Industrial Revolution, not the South. Of course
slavery and serfdom created huge wealth for those who owned the
slaves and controlled the serfs, but it did not create technological
innovation or prosperity for society.

No One Writes from Vindolanda

By ad 43 the Roman emperor Claudius had conquered England, but
not Scotland. A last, futile attempt was made by the Roman governor
Agricola, who gave up and, in ad 85, built a series of forts to protect
England’s northern border. One of the biggest of these was at
Vindolanda, thirty-five miles west of Newcastle and depicted on Map
11 at the far northwest of the Roman Empire. Later, Vindolanda was
incorporated into the eighty-five-mile defensive wall that the emperor
Hadrian constructed, but in ad 103, when a Roman centurion,
Candidus, was stationed there, it was an isolated fort. Candidus was
engaged with his friend Octavius in supplying the Roman garrison

and received a reply from Octavius to a letter he had sent:

Octavius to his brother Candidus, greetings.

I have several times written to you that I have bought
about five thousand modii of ears of grain, on account of
which I need cash. Unless you send me some cash, at least
five hundred denarii, the result will be that I shall lose
what I have laid out as a deposit, about three hundred
denarii, and I shall be embarrassed. So, I ask you, send me
some cash as soon as possible. The hides which you write
are at Cataractonium — write that they be given to me and
the wagon about which you write. I would have already
been to collect them except that I did not care to injure
the animals while the roads are bad. See with Tertius
about the 8V2 denarii which he received from Fatalis. He
has not credited them to my account. Make sure that you
send me cash so that I may have ears of grain on the
threshing-floor. Greet Spectatus and Firmus. Farewell.

The correspondence between Candidus and Octavius illustrates
some significant facets of the economic prosperity of Roman England:
It reveals an advanced monetary economy with financial services. It
reveals the presence of constructed roads, even if sometimes in bad
condition. It reveals the presence of a fiscal system that raised taxes
to pay Candidus’s wages. Most obviously it reveals that both men
were literate and were able to take advantage of a postal service of
sorts. Roman England also benefited from the mass manufacture of
high-quality pottery, particularly in Oxfordshire; urban centers with
baths and public buildings; and house construction techniques using
mortar and tiles for roofs.

By the fourth century, all were in decline, and after ad 411 the
Roman Empire gave up on England. Troops were withdrawn; those
left were not paid, and as the Roman state crumbled, administrators
were expelled by the local population. By ad 450 all these trappings of
economic prosperity were gone. Money vanished from circulation.

Urban areas were abandoned, and buildings stripped of stone. The
roads were overgrown with weeds. The only type of pottery
fabricated was crude and handmade, not manufactured. People forgot
how to use mortar, and literacy declined substantially. Roofs were
made of branches, not tiles. Nobody wrote from Vindolanda anymore.

After ad 411, England experienced an economic collapse and
became a poor backwater — and not for the first time. In the previous
chapter we saw how the Neolithic Revolution started in the Middle
East around 9500 bc. While the inhabitants of Jericho and Abu
Hureyra were living in small towns and farming, the inhabitants of
England were still hunting and gathering, and would do so for at least
another 5,500 years. Even then the English didn’t invent farming or
herding; these were brought from the outside by migrants who had
been spreading across Europe from the Middle East for thousands of
years. As the inhabitants of England caught up with these major
innovations, those in the Middle East were inventing cities, writing,
and pottery. By 3500 bc, large cities such as Uruk and Ur emerged in
Mesopotamia, modern Iraq. Uruk may have had a population of
fourteen thousand in 3500 bc, and forty thousand soon afterward. The
potter’s wheel was invented in Mesopotamia at about the same time
as was wheeled transportation. The Egyptian capital of Memphis
emerged as a large city soon thereafter. Writing appeared
independently in both regions. While the Egyptians were building the
great pyramids of Giza around 2500 bc, the English constructed their
most famous ancient monument, the stone circle at Stonehenge. Not
bad by English standards, but not even large enough to have housed
one of the ceremonial boats buried at the foot of King Khufu’s
pyramid. England continued to lag behind and to borrow from the
Middle East and the rest of Europe up to and including the Roman
period.

Despite such an inauspicious history, it was in England that the first
truly inclusive society emerged and where the Industrial Revolution
got under way. We argued earlier (this page-this page) that this was
the result of a series of interactions between small institutional
differences and critical junctures — for example, the Black Death and

the discovery of the Americas. English divergence had historical
roots, but the view from Vindolanda suggests that these roots were
not that deep and certainly not historically predetermined. They were
not planted in the Neolithic Revolution, or even during the centuries
of Roman hegemony. By ad 450, at the start of what historians used to
call the Dark Ages, England had slipped back into poverty and
political chaos. There would be no effective centralized state in
England for hundreds of years.

Diverging Paths

The rise of inclusive institutions and the subsequent industrial growth
in England did not follow as a direct legacy of Roman (or earlier)
institutions. This does not mean that nothing significant happened
with the fall of the Western Roman Empire, a major event affecting
most of Europe. Since different parts of Europe shared the same
critical junctures, their institutions would drift in a similar fashion,
perhaps in a distinctively European way. The fall of the Roman
Empire was a crucial part of these common critical junctures. This
European path contrasts with paths in other parts of the world,
including sub-Saharan Africa, Asia, and the Americas, which
developed differently partly because they did not face the same
critical junctures.

Roman England collapsed with a bang. This was less true in Italy,
or Roman Gaul (modern France), or even North Africa, where many
of the old institutions lived on in some form. Yet there is no doubt
that the change from the dominance of a single Roman state to a
plethora of states run by Franks, Visigoths, Ostrogoths, Vandals, and
Burgundians was significant. The power of these states was far
weaker, and they were buffeted by a long series of incursions from
their peripheries. From the north came the Vikings and Danes in their
longboats. From the east came the Hunnic horsemen. Finally, the
emergence of Islam as a religion and political force in the century
after the death of Mohammed in ad 632 led to the creation of new

Islamic states in most of the Byzantine Empire, North Africa, and
Spain. These common processes rocked Europe, and in their wake a
particular type of society, commonly referred to as feudal, emerged.
Feudal society was decentralized because strong central states had
atrophied, even if some rulers such as Charlemagne attempted to
reconstruct them.

Feudal institutions, which relied on unfree, coerced labor (the
serfs), were obviously extractive, and they formed the basis for a long
period of extractive and slow growth in Europe during the Middle
Ages. But they also were consequential for later developments. For
instance, during the reduction of the rural population to the status of
serfs, slavery disappeared from Europe. At a time when it was
possible for elites to reduce the entire rural population to serfdom, it
did not seem necessary to have a separate class of slaves as every
previous society had had. Feudalism also created a power vacuum in
which independent cities specializing in production and trade could
flourish. But when the balance of power changed after the Black
Death, and serfdom began to crumble in Western Europe, the stage
was set for a much more pluralistic society without the presence of
any slaves.

The critical junctures that gave rise to feudal society were distinct,
but they were not completely restricted to Europe. A relevant
comparison is with the modern African country of Ethiopia, which
developed from the Kingdom of Aksum, founded in the north of the
country around 400 bc. Aksum was a relatively developed kingdom
for its time and engaged in international trade with India, Arabia,
Greece, and the Roman Empire. It was in many ways comparable to
the Eastern Roman Empire in this period. It used money, built
monumental public buildings and roads, and had very similar
technology, for example, in agriculture and shipping. There are also
interesting ideological parallels between Aksum and Rome. In ad 312,
the Roman emperor Constantine converted to Christianity, as did
King Ezana of Aksum about the same time. Map 12 shows the
location of the historical state of Aksum in modern-day Ethiopia and
Eritrea, with outposts across the Red Sea in Saudi Arabia and Yemen.

Just as Rome declined, so did Aksum, and its historical decline
followed a pattern close to that of the Western Roman Empire. The
role played by the Huns and Vandals in the decline of Rome was
taken by the Arabs, who, in the seventh century, expanded into the
Red Sea and down the Arabian Peninsula. Aksum lost its colonies in
Arabia and its trade routes. This precipitated economic decline:
money stopped being coined, the urban population fell, and there was
a refocusing of the state into the interior of the country and up into
the highlands of modern Ethiopia.

Saudi Arabia

Oman

Djibouti

Rahanweyn

Hawiye

mmIMiu

Da rod

Tanzania

Sudan

Red Sea

cr>

Addis Ahalvi

A

Ethiopia

Indian Ocean

Aksum

Peripheral Aksum
Somali ethnic limits
Modern boundaries

Map 12: The Aksum Empire anti the Somali elan families

In Europe, feudal institutions emerged following the collapse of
central state authority. The same thing happened in Ethiopia, based
on a system called gait, which involved a grant of land by the
emperor. The institution is mentioned in thirteenth-century

manuscripts, though it may have originated much earlier. The term
gait is derived from an Amharic word meaning “he assigned a fief.” It
signified that in exchange for the land, the gait holder had to provide
services to the emperor, particularly military ones. In turn, the gait
holder had the right to extract tribute from those who farmed the
land. A variety of historical sources suggest that gait holders extracted
between one-half and three-quarters of the agricultural output of
peasants. This system was an independent development with notable
similarities to European feudalism, but probably even more
extractive. At the height of feudalism in England, serfs faced less
onerous extraction and lost about half of their output to their lords in
one form or another.

But Ethiopia was not representative of Africa. Elsewhere, slavery
was not replaced by serfdom; African slavery and the institutions that
supported it were to continue for many more centuries. Even
Ethiopia’s ultimate path would be very different. After the seventh
century, Ethiopia remained isolated in the mountains of East Africa
from the processes that subsequently influenced the institutional path
of Europe, such as the emergence of independent cities, the nascent
constraints on monarchs and the expansion of Atlantic trade after the
discovery of the Americas. In consequence, its version of absolutist
institutions remained largely unchallenged. The African continent
would later interact in a very different capacity with Europe and Asia.
East Africa became a major supplier of slaves to the Arab world, and
West and Central Africa would be drawn into the world economy
during the European expansion associated with the Atlantic trade as
suppliers of slaves. How the Atlantic trade led to sharply divergent
paths between Western Europe and Africa is yet another example of
institutional divergence resulting from the interaction between
critical junctures and existing institutional differences. While in
England the profits of the slave trade helped to enrich those who
opposed absolutism, in Africa they helped to create and strengthen
absolutism.

Farther away from Europe, the processes of institutional drift were
obviously even freer to go their own way. In the Americas, for

example, which had been cut off from Europe around 15,000 bc by
the melting of the ice that linked Alaska to Russia, there were similar
institutional innovations as those of the Natufians, leading to
sedentary life, hierarchy, and inequality — in short, extractive
institutions. These took place first in Mexico and in Andean Peru and
Bolivia, and led to the American Neolithic Revolution, with the
domestication of maize. It was in these places that early forms of
extractive growth took place, as we have seen in the Maya city-states.
But in the same way that big breakthroughs toward inclusive
institutions and industrial growth in Europe did not come in places
where the Roman world had the strongest hold, inclusive institutions
in the Americas did not develop in the lands of these early
civilizations. In fact, as we saw in chapter 1, these densely settled
civilizations interacted in a perverse way with European colonialism
to create a “reversal of fortune,” making the places that were
previously relatively wealthy in the Americas relatively poor. Today it
is the United States and Canada, which were then far behind the
complex civilizations in Mexico, Peru, and Bolivia, that are much
richer than the rest of the Americas.

Consequences of Early Growth

The long period between the Neolithic Revolution, which started in
9500 bc, and the British Industrial Revolution of the late eighteenth
century is littered with spurts of economic growth. These spurts were
triggered by institutional innovations that ultimately faltered. In
Ancient Rome the institutions of the Republic, which created some
degree of economic vitality and allowed for the construction of a
massive empire, unraveled after the coup of Julius Caesar and the
construction of the empire under Augustus. It took centuries for the
Roman Empire finally to vanish, and the decline was drawn out; but
once the relatively inclusive republican institutions gave way to the
more extractive institutions of the empire, economic regress became
all but inevitable.

The Venetian dynamics were similar. The economic prosperity of
Venice was forged by institutions that had important inclusive
elements, but these were undermined when the existing elite closed
the system to new entrants and even banned the economic
institutions that had created the prosperity of the republic.

However notable the experience of Rome, it was not Rome’s
inheritance that led directly to the rise of inclusive institutions in
England and to the British Industrial Revolution. Historical factors
shape how institutions develop, but this is not a simple,
predetermined, cumulative process. Rome and Venice illustrate how
early steps toward inclusivity were reversed. The economic and
institutional landscape that Rome created throughout Europe and the
Middle East did not inexorably lead to the more firmly rooted
inclusive institutions of later centuries. In fact, these would emerge
first and most strongly in England, where the Roman hold was
weakest and where it disappeared most decisively, almost without a
trace, during the fifth century ad. Instead, as we discussed in chapter
4, history plays a major role through institutional drift that creates
institutional differences, albeit sometimes small, which then get
amplified when they interact with critical junctures. It is because
these differences are often small that they can be reversed easily and
are not necessarily the consequence of a simple cumulative process.

Of course, Rome had long-lasting effects on Europe. Roman law and
institutions influenced the laws and institutions that the kingdoms of
the barbarians set up after the collapse of the Western Roman Empire.
It was also Rome’s fall that created the decentralized political
landscape that developed into the feudal order. The disappearance of
slavery and the emergence of independent cities were long, drawn out
(and, of course, historically contingent) by-products of this process.
These would become particularly consequential when the Black Death
shook feudal society deeply. Out of the ashes of the Black Death
emerged stronger towns and cities, and a peasantry no longer tied to
the land and newly free of feudal obligations. It was precisely these
critical junctures unleashed by the fall of the Roman Empire that led
to a strong institutional drift affecting all of Europe in a way that has

no parallel in sub-Saharan Africa, Asia, or the Americas.

By the sixteenth century, Europe was institutionally very distinct
from sub-Saharan Africa and the Americas. Though not much richer
than the most spectacular Asian civilizations in India or China,
Europe differed from these polities in some key ways. For example, it
had developed representative institutions of a sort unseen there.
These were to play a critical role in the development of inclusive
institutions. As we will see in the next two chapters, small
institutional differences would be the ones that would really matter
within Europe; and these favored England, because it was there that
the feudal order had made way most comprehensively for
commercially minded farmers and independent urban centers where
merchants and industrialists could flourish. These groups were
already demanding more secure property rights, different economic
institutions, and political voice from their monarchs. This whole
process would come to a head in the seventeenth century.

7.

THE TURNING POINT

Trouble with Stockings

In 1583 William Lee returned from his studies at the University of

Cambridge to become the local priest in Calverton, England. Elizabeth
I (1558-1603) had recently issued a ruling that her people should
always wear a knitted cap. Lee recorded that “knitters were the only
means of producing such garments but it took so long to finish the
article. I began to think. I watched my mother and my sisters sitting
in the evening twilight plying their needles. If garments were made
by two needles and one line of thread, why not several needles to
take up the thread.”

This momentous thought was the beginning of the mechanization
of textile production. Lee became obsessed with making a machine
that would free people from endless hand-knitting. He recalled, “My
duties to Church and family I began to neglect. The idea of my
machine and the creating of it ate into my heart and brain.”

Finally, in 1589, his “stocking frame” knitting machine was ready.
He traveled to London with excitement to seek an interview with
Elizabeth I to show her how useful the machine would be and to ask
her for a patent that would stop other people from copying the
design. He rented a building to set the machine up and, with the help
of his local member of Parliament Richard Parkyns, met Henry Carey,
Lord Hundson, a member of the Queen’s Privy Council. Carey
arranged for Queen Elizabeth to come see the machine, but her
reaction was devastating. She refused to grant Lee a patent, instead
observing, “Thou aimest high, Master Lee. Consider thou what the
invention could do to my poor subjects. It would assuredly bring to

them ruin by depriving them of employment, thus making them
beggars.” Crushed, Lee moved to France to try his luck there; when he
failed there, too, he returned to England, where he asked James I
(1603-1625), Elizabeth’s successor, for a patent. James I also refused,
on the same grounds as Elizabeth. Both feared that the mechanization
of stocking production would be politically destabilizing. It would
throw people out of work, create unemployment and political
instability, and threaten royal power. The stocking frame was an
innovation that promised huge productivity increases, but it also
promised creative destruction.

The reaction to Lee’s brilliant invention illustrates a key idea of this
book. The fear of creative destruction is the main reason why there
was no sustained increase in living standards between the Neolithic
and Industrial revolutions. Technological innovation makes human
societies prosperous, but also involves the replacement of the old with
the new, and the destruction of the economic privileges and political
power of certain people. For sustained economic growth we need new
technologies, new ways of doing things, and more often than not they
will come from newcomers such as Lee. It may make society
prosperous, but the process of creative destruction that it initiates
threatens the livelihood of those who work with old technologies,
such as the hand-knitters who would have found themselves
unemployed by Lee’s technology. More important, major innovations
such as Lee’s stocking frame machine also threaten to reshape
political power. Ultimately it was not concern about the fate of those
who might become unemployed as a result of Lee’s machine that led
Elizabeth I and James I to oppose his patent; it was their fear that
they would become political losers — their concern that those
displaced by the invention would create political instability and
threaten their own power. As we saw with the Luddites (this
page-this page), it is often possible to bypass the resistance of
workers such as hand-knitters. But the elite, especially when their
political power is threatened, form a more formidable barrier to

innovation. The fact that they have much to lose from creative
destruction means not only that they will not be the ones introducing
new innovations but also that they will often resist and try to stop
such innovations. Thus society needs newcomers to introduce the
most radical innovations, and these newcomers and the creative
destruction they wreak must often overcome several sources of
resistance, including that from powerful rulers and elites.

Prior to seventeenth-century England, extractive institutions were
the norm throughout history. They have at times been able to
generate economic growth, as shown in the last two chapters,
especially when they’ve contained inclusive elements, as in Venice
and Rome. But they did not permit creative destruction. The growth
they generated was not sustained, and came to an end because of the
absence of new innovations, because of political infighting generated
by the desire to benefit from extraction, or because the nascent
inclusive elements were conclusively reversed, as in Venice.

The life expectancy of a resident of the Natufian village of Abu
Hureyra was probably not that much different from that of a citizen
of Ancient Rome. The life expectancy of a typical Roman was fairly
similar to that of an average inhabitant of England in the seventeenth
century. In terms of incomes, in 301 ad the Roman emperor Diocletian
issued the Edict on Maximum Prices, which set out a schedule of
wages that various types of workers would be paid. We don’t know
exactly how well Diocletian’s wages and prices were enforced, but
when the economic historian Robert Allen used his edict to calculate
the living standards of a typical unskilled worker, he found them to
be almost exactly the same as those of an unskilled worker in
seventeenth-century Italy. Farther north, in England, wages were
higher and increasing, and things were changing. How this came to
be is the topic of this chapter.

Ever-present Political Conflict

Conflict over institutions and the distribution of resources has been

pervasive throughout history. We saw, for example, how political
conflict shaped the evolution of Ancient Rome and Venice, where it
was ultimately resolved in favor of the elites, who were able to
increase their hold on power.

English history is also full of conflict between the monarchy and its
subjects, between different factions fighting for power, and between
elites and citizens. The outcome, though, has not always been to
strengthen the power of those who held it. In 1215 the barons, the
layer of the elite beneath the king, stood up to King John and made
him sign the Magna Carta (“the Great Charter”) at Runnymede (see
Map 9, this page). This document enacted some basic principles that
were significant challenges to the authority of the king. Most
important, it established that the king had to consult with the barons
in order to raise taxes. The most contentious clause was number 61,
which stated that “the barons shall choose any twenty-five barons of
the realm they wish, who with all their might are to observe,
maintain and cause to be observed the peace and liberties which we
have granted and confirmed to them by this our present charter.” In
essence, the barons created a council to make sure that the king
implemented the charter, and if he didn’t, these twenty-five barons
had the right to seize castles, lands, and possessions "... until, in their
judgement, amends have been made.” King John didn’t like the
Magna Carta, and as soon as the barons dispersed, he got the pope to
annul it. But both the political power of the barons and the influence
of the Magna Carta remained. England had taken its first hesitant step
toward pluralism.

Conflict over political institutions continued, and the power of the
monarchy was further constrained by the first elected Parliament in
1265. Unlike the Plebeian Assembly in Rome or the elected
legislatures of today, its members had originally been feudal nobles,
and subsequently were knights and the wealthiest aristocrats of the
nation. Despite consisting of elites, the English Parliament developed
two distinguishing characteristics. First, it represented not only elites
closely allied to the king but also a broad set of interests, including
minor aristocrats involved in different walks of life, such as commerce

and industry, and later the “gentry,” a new class of commercial and
upwardly mobile farmers. Thus the Parliament empowered a quite
broad section of society — especially by the standards of the time.
Second, and largely as a result of the first characteristic, many
members of Parliament were consistently opposed to the monarchy’s
attempts to increase its power and would become the mainstay of
those fighting against the monarchy in the English Civil War and then
in the Glorious Revolution.

The Magna Carta and the first elected Parliament notwithstanding,
political conflict continued over the powers of the monarchy and who
was to be king. This intra-elite conflict ended with the War of the
Roses, a long duel between the Houses of Lancaster and York, two
families with contenders to be king. The winners were the
Lancastrians, whose candidate for king, Henry Tudor, became Henry
VII in 1485.

Two other interrelated processes took place. The first was
increasing political centralization, put into motion by the Tudors.
After 1485 Henry VII disarmed the aristocracy, in effect
demilitarizing them and thereby massively expanding the power of
the central state. His son, Henry VIII, then implemented through his
chief minister, Thomas Cromwell, a revolution in government. In the
1530s, Cromwell introduced a nascent bureaucratic state. Instead of
the government being just the private household of the king, it could
become a separate set of enduring institutions. This was
complemented by Henry VIII’s break with the Roman Catholic Church
and the “Dissolution of the Monasteries,” in which Henry
expropriated all the Church lands. The removal of the power of the
Church was part of making the state more centralized. This
centralization of state institutions meant that for the first time,
inclusive political institutions became possible. This process initiated
by Henry VII and Henry VIII not only centralized state institutions but
also increased the demand for broader-based political representation.
The process of political centralization can actually lead to a form of
absolutism, as the king and his associates can crush other powerful
groups in society. This is indeed one of the reasons why there will be

opposition against state centralization, as we saw in chapter 3.
However, in opposition to this force, the centralization of state
institutions can also mobilize demand for a nascent form of pluralism,
as it did in Tudor England. When the barons and local elites recognize
that political power will be increasingly more centralized and that
this process is hard to stop, they will make demands to have a say in
how this centralized power is used. In England during the late
fifteenth and sixteenth centuries, this meant greater efforts by these
groups to have Parliament as a counterweight against the Crown and
to partially control the way the state functioned. Thus the Tudor
project not only initiated political centralization, one pillar of
inclusive institutions, but also indirectly contributed to pluralism, the
other pillar of inclusive institutions.

These developments in political institutions took place in the
context of other major changes in the nature of society. Particularly
significant was the widening of political conflict which was
broadening the set of groups with the ability to make demands on the
monarchy and the political elites. The Peasants’ Revolt of 1381 (this
page) was pivotal, after which the English elite were rocked by a long
sequence of popular insurrections. Political power was being
redistributed not simply from the king to the lords, but also from the
elite to the people. These changes, together with the increasing
constraints on the king’s power, made the emergence of a broad
coalition opposed to absolutism possible and thus laid the foundations
for pluralistic political institutions.

Though contested, the political and economic institutions the
Tudors inherited and sustained were clearly extractive. In 1603
Elizabeth I, Henry VIII’s daughter who had acceded to the throne of
England in 1553, died without children, and the Tudors were
replaced by the Stuart dynasty. The first Stuart king, James I,
inherited not only the institutions but the conflicts over them. He
desired to be an absolutist ruler. Though the state had become more
centralized and social change was redistributing power in society,
political institutions were not yet pluralistic. In the economy,
extractive institutions manifested themselves not just in the

opposition to Lee’s invention, but in the form of monopolies,
monopolies, and more monopolies. In 1601 a list of these was read
out in Parliament, with one member ironically asking, “Is not bread
there?” By 1621 there were seven hundred of them. As the English
historian Christopher Hill put it, a man lived

in a house built with monopoly bricks, with windows ... of
monopoly glass; heated by monopoly coal (in Ireland
monopoly timber), burning in a grate made of monopoly
iron ... He washed himself in monopoly soap, his clothes
in monopoly starch. He dressed in monopoly lace,
monopoly linen, monopoly leather, monopoly gold
thread ... His clothes were held up by monopoly belts,
monopoly buttons, monopoly pins. They were dyed with
monopoly dyes. He ate monopoly butter, monopoly
currants, monopoly red herrings, monopoly salmon, and
monopoly lobsters. His food was seasoned with monopoly
salt, monopoly pepper, monopoly vinegar ... He wrote
with monopoly pens, on monopoly writing paper; read
(through monopoly spectacles, by the light of monopoly
candles) monopoly printed books.

These monopolies, and many more, gave individuals or groups the
sole right to control the production of many goods. They impeded the
type of allocation of talent, which is so crucial to economic
prosperity.

Both James I and his son and successor Charles I aspired to
strengthen the monarchy, reduce the influence of Parliament, and
establish absolutist institutions similar to those being constructed in
Spain and France to further their and the elite’s control of the
economy, making institutions more extractive. The conflict between
James I and Parliament came to a head in the 1620s. Central in this
conflict was the control of trade both overseas and within the British
Isles. The Crown’s ability to grant monopolies was a key source of
revenue for the state, and was used frequently as a way of granting

exclusive rights to supporters of the king. Not surprisingly, this
extractive institution blocking entry and inhibiting the functioning of
the market was also highly damaging to economic activity and to the
interests of many members of Parliament. In 1623 Parliament scored
a notable victory by managing to pass the Statute of Monopolies,
which prohibited James I from creating new domestic monopolies. He
would still be able to grant monopolies on international trade,
however, since the authority of Parliament did not extend to
international affairs. Existing monopolies, international or otherwise,
stood untouched.

Parliament did not sit regularly and had to be called into session by
the king. The convention that emerged after the Magna Carta was
that the king was required to convene Parliament to get assent for
new taxes. Charles I came to the throne in 1625, declined to call
Parliament after 1629, and intensified James I’s efforts to build a
more solidly absolutist regime. He induced forced loans, meaning that
people had to “lend” him money, and he unilaterally changed the
terms of loans and refused to repay his debts. He created and sold
monopolies in the one dimension that the Statute of Monopolies had
left to him: overseas trading ventures. He also undermined the
independence of the judiciary and attempted to intervene to influence
the outcome of legal cases. He levied many fines and charges, the
most contentious of which was “ship money” — in 1634 taxing the
coastal counties to pay for the support of the Royal Navy and, in
1635, extending the levy to the inland counties. Ship money was
levied each year until 1640.

Charles’s increasingly absolutist behavior and extractive policies
created resentment and resistance throughout the country. In 1640 he
faced conflict with Scotland and, without enough money to put a
proper army into the field, was forced to call Parliament to ask for
more taxes. The so-called Short Parliament sat for only three weeks.
The parliamentarians who came to London refused to talk about
taxes, but aired many grievances, until Charles dismissed them. The
Scots realized that Charles did not have the support of the nation and
invaded England, occupying the city of Newcastle. Charles opened

negotiations, and the Scots demanded that Parliament be involved.
This induced Charles to call what then became known as the Long
Parliament, because it continued to sit until 1648, refusing to dissolve
even when Charles demanded it do so.

In 1642 the Civil War broke out between Charles and Parliament,
even though there were many in Parliament who sided with the
Crown. The pattern of conflicts reflected the struggle over economic
and political institutions. Parliament wanted an end to absolutist
political institutions; the king wanted them strengthened. These
conflicts were rooted in economics. Many supported the Crown
because they had been granted lucrative monopolies. For example,
the local monopolies controlled by the rich and powerful merchants
of Shrewsbury and Oswestry were protected by the Crown from
competition by London merchants. These merchants sided with
Charles I. On the other side, the metallurgical industry had flourished
around Birmingham because monopolies were weak there and
newcomers to the industry did not have to serve a seven-year
apprenticeship, as they did in other parts of the country. During the
Civil War, they made swords and produced volunteers for the
parliamentary side. Similarly, the lack of guild regulation in the
county of Lancashire allowed for the development before 1640 of the
“New Draperies,” a new style of lighter cloth. The area where the
production of these cloths was concentrated was the only part of
Lancashire to support Parliament.

Under the leadership of Oliver Cromwell, the Parliamentarians —
known as the Roundheads after the style in which their hair was
cropped — defeated the royalists, known as Cavaliers. Charles was
tried and executed in 1649. His defeat and the abolition of the
monarchy did not, however, result in inclusive institutions. Instead,
monarchy was replaced by the dictatorship of Oliver Cromwell.
Following Cromwell’s death, the monarchy was restored in 1660 and
clawed back many of the privileges that had been stripped from it in
1649. Charles’s son, Charles II, then set about the same program of
creating absolutism in England. These attempts were only intensified
by his brother James II, who ascended to the throne after Charles’s

death in 1685. In 1688 James’s attempt to reestablish absolutism
created another crisis and another civil war. Parliament this time was
more united and organized. They invited the Dutch Statholder,
William of Orange, and his wife, Mary, James’s Protestant daughter,
to replace James. William would bring an army and claim the throne,
to rule not as an absolutist monarch but under a constitutional
monarchy forged by Parliament. Two months after William’s landing
in the British Isles at Brixham in Devon (see Map 9, this page),
James’s army disintegrated and he fled to France.

The Glorious Revolution

After victory in the Glorious Revolution, Parliament and William
negotiated a new constitution. The changes were foreshadowed by
William’s “Declaration,” made shortly prior to his invasion. They
were further enshrined in the Declaration of Rights, produced by
Parliament in February 1689. The Declaration was read out to
William at the same session where he was offered the crown. In many
ways the Declaration, which would be called the Bill of Rights after
its signing into law, was vague. Crucially, however, it did establish
some central constitutional principles. It determined the succession to
the throne, and did so in a way that departed significantly from the
then-received hereditary principles. If Parliament could remove a
monarch and replace him with one more to their liking once, then
why not again? The Declaration of Rights also asserted that the
monarch could not suspend or dispense with laws, and it reiterated
the illegality of taxation without parliamentary consent. In addition,
it stated that there could be no standing army in England without
parliamentary consent. Vagueness entered into such clauses as
number 8, which stated, “The election of members of Parliament
ought to be free,” but did not specify how “free” was to be
determined. Even vaguer was clause 13, whose main point was that
Parliaments ought to be held frequently. Since when and whether
Parliament would be held had been such a contentious issue for the
entire century, one might have expected much more specificity in this

clause. Nevertheless, the reason for this vague wording is clear.
Clauses have to be enforced. During the reign of Charles II, a
Triennial Act had been in place that asserted that Parliaments had to
be called at least once every three years. But Charles ignored it, and
nothing happened, because there was no method of enforcing it. After
1688, Parliament could have tried to introduce a method for
enforcing this clause, as the barons had done with their council after
King John signed the Magna Carta. They did not do so because they
did not need to. This was because authority and decision-making
power switched to Parliament after 1688. Even without specific
constitutional rules or laws, William simply gave up on many of the
practices of previous kings. He stopped interfering in legal decisions
and gave up previous “rights,” such as getting the customs revenues
for life. Taken together, these changes in political institutions
represented the triumph of Parliament over the king, and thus the end
of absolutism in England and subsequently Great Britain — as England
and Scotland were united by the Act of Union in 1707. From then on
Parliament was firmly in control of state policy. This made a huge
difference, because the interests of Parliament were very different
from those of the Stuart kings. Since many of those in Parliament had
important investments in trade and industry, they had a strong stake
in enforcing property rights. The Stuarts had frequently infringed on
property rights; now they would be upheld. Moreover, when the
Stuarts controlled how the government spent money, Parliament
opposed greater taxes and balked at strengthening the power of the
state. Now that Parliament itself controlled spending, it was happy to
raise taxes and spend the money on activities that it deemed valuable.
Chief among them was the strengthening of the navy, which would
protect the overseas mercantile interests of many of the members of
Parliament.

Even more important than the interest of parliamentarians was the
emerging pluralistic nature of political institutions. The English
people now had access to Parliament, and the policy and economic
institutions made in Parliament, in a way they never had when policy
was driven by the king. This was partially, of course, because

members of Parliament were elected. But since England was far from
being a democracy in this period, this access provided only a modest
amount of responsiveness. Among its many inequities was that less
than 2 percent of the population could vote in the eighteenth century,
and these had to be men. The cities where the Industrial Revolution
took place, Birmingham, Leeds, Manchester, and Sheffield, had no
independent representation in Parliament. Instead, rural areas were
overrepresented. Just as bad, the right to vote in the rural areas, the
“counties,” was based on ownership of land, and many urban areas,
the “boroughs,” were controlled by a small elite who did not allow
the new industrialists to vote or run for office. In the borough of
Buckingham, for instance, thirteen burgesses had the exclusive right
to vote. On top of this there were the “rotten boroughs,” which had
historically had the right to vote but had “rotted away,” either
because their population had moved over time or, in the case on
Dunwich on the east coast of England, had actually fallen into the
ocean as a result of coastal erosion. In each of these rotten boroughs,
a small number of voters elected two members of Parliament. Old
Sarum had seven voters, Dunwich thirty-two, and each elected two
members of Parliament.

But there were other ways to influence Parliament and thus
economic institutions. The most important was via petitioning, and
this was much more significant than the limited extent of democracy
for the emergence of pluralism after the Glorious Revolution.
Anybody could petition Parliament, and petition they did.
Significantly, when people petitioned, Parliament listened. It is this
more than anything that reflects the defeat of absolutism, the
empowerment of a fairly broad segment of society, and the rise of
pluralism in England after 1688. The frantic petitioning activity
shows that it was indeed such a broad group in society, far beyond
those sitting or even being represented in Parliament, that had the
power to influence the way the state worked. And they used it.

The case of monopolies best illustrates this. We saw above how
monopolies were at the heart of extractive economic institutions in
the seventeenth century. They came under attack in 1623 with the

Statute of Monopolies, and were a serious bone of contention during
the English Civil War. The Long Parliament abolished all the domestic
monopolies that so impinged on people’s lives. Though Charles II and
James II could not bring these back, they managed to maintain the
ability to grant overseas monopolies. One was the Royal African
Company, whose monopoly charter was issued by Charles II in 1660.
This company held a monopoly on the lucrative African slave trade,
and its governor and major shareholder was Charles’s brother James,
soon to become James II. After 1688 the Company lost not just its
governor, but its main supporter. James had assiduously protected the
monopoly of the company against “interlopers,” the independent
traders who tried to buy slaves in West Africa and sell them in the
Americas. This was a very profitable trade, and the Royal African
Company faced a lot of challenges, since all other English trade in the
Atlantic was free. In 1689 the Company seized the cargo of an
interloper, one Nightingale. Nightingale sued the Company for illegal
seizure of goods, and Chief Justice Holt ruled that the Company’s
seizure was unlawful because it was exercising a monopoly right
created by royal prerogative. Holt reasoned that monopoly privileges
could be created only by statute, and this had to be done by
Parliament. So Holt pushed all future monopolies, not just of the
Royal Africa Company, into the hands of Parliament. Before 1688
James II would quickly have removed any judge who made such a
ruling. After 1688 things were different.

Parliament now had to decide what to do with the monopoly, and
the petitions began to fly. One hundred and thirty-five came from
interlopers demanding free access to trade in the Atlantic. Though the
Royal African Company responded in kind, it could not hope to match
the number or scope of the petitions demanding its demise. The
interlopers succeeded in framing their opposition in terms not just of
narrow self-interest, but of national interest, which indeed it was. As
a result, only 5 of the 135 petitions were signed by the interlopers
themselves, and 73 of the interlopers’ petitions came from the
provinces outside London, as against 8 for the Company. From the
colonies, where petitioning was also allowed, the interlopers gathered

27 petitions, the Company 11. The interlopers also gathered far more
signatures for their petitions, in total 8,000, as opposed to 2,500 for
the Company. The struggle continued until 1698, when the Royal
African Company monopoly was abolished.

Along with this new locus for the determination of economic
institutions and the new responsiveness after 1688, parliamentarians
started making a series of key changes in economic institutions and
government policy that would ultimately pave the way for the
Industrial Revolution. Property rights eroded under the Stuarts were
strengthened. Parliament began a process of reform in economic
institutions to promote manufacturing, rather than taxing and
impeding it. The “hearth tax” — an annual tax for each fireplace or
stove, which fell most heavily on manufacturers, who were bitterly
opposed to it — was abolished in 1689, soon after William and Mary
ascended the throne. Instead of taxing hearths, Parliament moved to
start taxing land.

Redistributing the tax burden was not the only pro-manufacturing
policy that Parliament supported. A whole series of acts and
legislations that would expand the market and the profitability of
woolen textiles was passed. This all made political sense, since many
of the parliamentarians who opposed James were heavily invested in
these nascent manufacturing enterprises. Parliament also passed
legislation that allowed for a complete reorganization of property
rights in land, permitting the consolidation and elimination of many
archaic forms of property and user rights.

Another priority of Parliament was reforming finance. Though
there had been an expansion of banking and finance in the period
leading up to the Glorious Revolution, this process was further
cemented by the creation of the Bank of England in 1694, as a source
of funds for industry. It was another direct consequence of the
Glorious Revolution. The foundation of the Bank of England paved
the way for a much more extensive “financial revolution,” which led
to a great expansion of financial markets and banking. By the early
eighteenth century, loans would be available to everyone who could
put up the necessary collateral. The records of a relatively small bank,

C. Hoare’s & Co. in London, which have survived intact from the
period 1702-1724, illustrate this point. Though the bank did lend
money to aristocrats and lords, fully two-thirds of the biggest
borrowers from Hoare’s over this period were not from the privileged
social classes. Instead they were merchants and businessmen,
including one John Smith, a man with the name of the eponymous
average Englishman, who was loaned £2,600 by the bank during the
period 1715-1719.

So far we have emphasized how the Glorious Revolution
transformed English political institutions, making them more
pluralistic, and also started laying the foundations for inclusive
economic institutions. There is one more significant change in
institutions that emerged from the Glorious Revolution: Parliament
continued the process of political centralization that was initiated by
the Tudors. It was not just that constraints increased, or that the state
regulated the economy in a different way, or that the English state
spent money on different things; but also the capability and capacity
of the state increased in all directions. This again illustrates the
linkages between political centralization and pluralism: Parliament
had opposed making the state more effective and better resourced
prior to 1688 because it could not control it. After 1688 it was a
different story.

The state started expanding, with expenditures soon reaching
around 10 percent of national income. This was underpinned by an
expansion of the tax base, particularly with respect to the excise tax,
which was levied on the production of a long list of domestically
produced commodities. This was a very large state budget for the
period, and is in fact larger than what we see today in many parts of
the world. The state budgets in Colombia, for example, reached this
relative size only in the 1980s. In many parts of sub-Saharan Africa —
for example, in Sierra Leone — the state budget even today would be
far smaller relative to the size of the economy without the large
inflows of foreign aid.

But the expansion of the size of the state is only part of the process
of political centralization. More important than this was the

qualitative way the state functioned and the way those who
controlled it and those who worked in it behaved. The construction of
state institutions in England reached back into the Middle Ages, but
as we’ve seen (this page), steps toward political centralization and the
development of modern administration were decisively taken by
Henry VII and Henry VIII. Yet the state was still far from the modern
form that would emerge after 1688. For example, many appointees
were made on political grounds, not because of merit or talent, and
the state still had a very limited capacity to raise taxes.

After 1688 Parliament began to improve the ability to raise revenue
through taxation, a development well illustrated by the excise tax
bureaucracy, which expanded rapidly from 1,211 people in 1690 to
4,800 by 1780. Excise tax inspectors were stationed throughout the
country, supervised by collectors who engaged in tours of inspection
to measure and check the amount of bread, beer, and other goods
subject to the excise tax. The extent of this operation is illustrated by
the reconstruction of the excise rounds of Supervisor George
Cowperth waite by the historian John Brewer. Between June 12 and
July 5, 1710, Supervisor Cowperth waite traveled 290 miles in the
Richmond district of Yorkshire. During this period he visited 263
victualers, 71 maltsters, 20 chandlers, and one common brewer. In
all, he took 81 different measurements of production and checked the
work of 9 different excisemen who worked for him. Eight years later
we find him working just as hard, but now in the Wakefield district,
in a different part of Yorkshire. In Wakefield, he traveled more than
nineteen miles a day on average and worked six days a week,
normally inspecting four or five premises. On his day off, Sunday, he
made up his books, so we have a complete record of his activities.
Indeed, the excise tax system had very elaborate record keeping.
Officers kept three different types of records, all of which were
supposed to match one another, and any tampering with these
records was a serious offense. This remarkable level of state
supervision of society exceeds what the governments of most poor
countries can achieve today, and this in 1710. Also significantly, after
1688 the state began to rely more on talent and less on political

appointees, and developed a powerful infrastructure to run the
country.

The Industrial Revolution

The Industrial Revolution was manifested in every aspect of the
English economy. There were major improvements in transportation,
metallurgy, and steam power. But the most significant area of
innovation was the mechanization of textile production and the
development of factories to produce these manufactured textiles. This
dynamic process was unleashed by the institutional changes that
flowed from the Glorious Revolution. This was not just about the
abolition of domestic monopolies, which had been achieved by 1640,
or about different taxes or access to finance. It was about a
fundamental reorganization of economic institutions in favor of
innovators and entrepreneurs, based on the emergence of more secure
and efficient property rights.

Improvements in the security and efficiency of property rights, for
example, played a central role in the “transportation revolution,”
paving the way for the Industrial Revolution. Investment in canals
and roads, the so-called turnpikes, massively increased after 1688.
These investments, by reducing the costs of transportation, helped to
create an important prerequisite for the Industrial Revolution. Prior to
1688, investment in such infrastructure had been impeded by
arbitrary acts by the Stuart kings. The change in the situation after
1688 is vividly illustrated by the case of the river Salwerpe, in
Worcestershire, England. In 1662 Parliament passed an act to
encourage investment to make the Salwerpe navigable, and the
Baldwyn family invested £6,000 to this end. In return they got the
right to charge people for navigation on the river. In 1693 a bill was
introduced to Parliament to transfer the rights to charge for
navigation to the Earl of Shrewsbury and Lord Coventry. This act was
challenged by Sir Timothy Baldwyn, who immediately submitted a
petition to Parliament claiming that the proposed bill was essentially
expropriating his father, who had already heavily invested in the

river in anticipation of the charges he could then levy. Baldwyn
argued that “the new act tends to make void the said act, and to take
away all the works and materials done in pursuance thereof.”
Reallocation of rights such as this was exactly the sort of thing done
by Stuart monarchs. Baldwyn noted, “[I]t is of dangerous
consequence to take away any person’s right, purchased under an act
of Parliament, without their consent.” In the event, the new act failed,
and Baldwyn’s rights were upheld. Property rights were much more
secure after 1688, partly because securing them was consistent with
the interests of Parliament and partly because pluralistic institutions
could be influenced by petitioning. We see here that after 1688 the
political system became significantly more pluralistic and created a
relatively level playing field within England.

Underlying the transportation revolution and, more generally, the
reorganization of land that took place in the eighteenth century were
parliamentary acts that changed the nature of property ownership.
Until 1688 there was even the legal fiction that all the land in
England was ultimately owned by the Crown, a direct legacy from the
feudal organization of society. Many pieces of land were encumbered
by numerous archaic forms of property rights and many cross-cutting
claims. Much land was held in so-called equitable estates, which
meant that the landowner could not mortgage, lease, or sell the land.
Common land could often be used only for traditional uses. There
were enormous impediments to using land in ways that would be
economically desirable. Parliament began to change this, allowing
groups of people to petition Parliament to simplify and reorganize
property rights, alterations that were subsequently embodied into
hundreds of acts of Parliament.

This reorganization of economic institutions also manifested itself
in the emergence of an agenda to protect domestic textile production
against foreign imports. Not surprisingly, parliamentarians and their
constituents were not opposed to all entry barriers and monopolies.
Those that would increase their own market and profits would be
welcome. However, crucially, the pluralistic political institutions — the
fact that Parliament represented, empowered, and listened to a broad

segment of society — meant that these entry barriers would not choke
other industrialists or completely shut out newcomers, as the Serrata
did in Venice (this page- this page). The powerful woolen
manufacturers soon made this discovery.

In 1688 some of the most significant imports into England were
textiles from India, calicoes and muslins, which comprised about one-
quarter of all textile imports. Also important were silks from China.
Calicoes and silks were imported by the East India Company, which
prior to 1688 enjoyed a government-sanctioned monopoly over the
trade with Asia. But the monopoly and the political power of the East
India Company was sustained through heavy bribes to James II. After
1688 the company was in a vulnerable position and soon under
attack. This took the form of an intense war of petitions with traders
hoping to trade in the Far East and India demanding that Parliament
sanction competition for the East India Company, while the company
responded with counterpetitions and offers to lend Parliament money.
The company lost, and a new East India Company to compete with it
was founded. But textile producers did not just want more
competition in the trade to India. They wanted imports of cheap
Indian textiles (calicoes) taxed or even banned. These producers faced
strong competition from these cheap Indian imports. At this point the
most important domestic manufacturers produced woolen textiles, but
the producers of cotton cloths were becoming both more important
economically and more powerful politically.

The wool industry mounted attempts to protect itself as early as the
1660s. It promoted the “Sumptuary Laws,” which, among other
things, prohibited the wearing of lighter cloth. It also lobbied
Parliament to pass legislation in 1666 and 1678 that would make it
illegal for someone to be buried in anything other than a woolen
shroud. Both measures protected the market for woolen goods and
reduced the competition that English manufacturers faced from Asia.
Nevertheless, in this period the East India Company was too strong to
restrict imports of Asian textiles. The tide changed after 1688.
Between 1696 and 1698, woolen manufacturers from East Anglia and
the West Country allied with silk weavers from London, Canterbury,

and the Levant Company to restrict imports. The silk importers from
the Levant, even if they had recently lost their monopoly, wished to
exclude Asian silks to create a niche for silks from the Ottoman
Empire. This coalition started to present bills to Parliament to place
restrictions on the wearing of Asian cottons and silks, and also
restrictions on the dyeing and printing of Asian textiles in England. In
response, in 1701, Parliament finally passed “an Act for the more
effectual imploying the poor, by incouraging the manufactures of this
kingdom.” From September 1701, it decreed: “All wrought silks,
bengals and stuffs, mixed with silk of herba, of the manufacture of
Persia, China, or East-India, all Calicoes painted, dyed, printed, or
stained there, which are or shall be imported into this kingdom, shall
not be worn.”

It was now illegal to wear Asian silks and calicoes in England. But
it was still possible to import them for reexport to Europe or
elsewhere, in particular to the American colonies. Moreover, plain
calicoes could be imported and finished in England, and muslins were
exempt from the ban. After a long struggle, these loopholes, as the
domestic woolen textile manufacturers viewed them, were closed by
the Calicoe Act of 1721: “After December 25, 1722, it shall not be
lawful for any person or persons whatsoever to use or wear in Great
Britain, in any garment or apparel whatsoever, any printed, painted,
stained or dyed Calicoe.” Though this act removed competition from
Asia for English woolens, it still left an active domestic cotton and
linen industry competing against the woolens: cotton and linen were
mixed to produce a popular cloth called fustian. Having excluded
Asian competition, the wool industry now turned to clamp down on
linen. Linen was primarily made in Scotland and Ireland, which gave
some scope to an English coalition to demand those countries’
exclusion from English markets. However, there were limits to the
power of the woolen manufacturers. Their new attempts encountered
strong opposition from fustian producers in the burgeoning industrial
centers of Manchester, Lancaster, and Liverpool. The pluralistic
political institutions implied that all these different groups now had
access to the policy process in Parliament via voting and, more

important, petitioning. Though the petitions flew from the pens of
both sides, amassing signatures for and against, the outcome of this
conflict was a victory for the new interests against those of the wool
industry. The Manchester Act of 1736 agreed that “great quantities of
stuffs made from linen yarn and cotton wool have for several years
past been manufactured, and have been printed and painted within
this kingdom of Great Britain.” It then went on to assert that “nothing
in the said recited Act [of 1721] shall extend or be construed to
prohibit the wearing or using in apparel, household stuff, furniture or
otherwise, any sort of stuff made out of linen yarn and cotton wool,
manufactured and printed or painted with any colour or colours
within the kingdom of Great Britain.”

The Manchester Act was a significant victory for the nascent cotton
manufacturers. But its historical and economic significance was in
fact much greater. First, it demonstrated the limits of entry barriers
that the pluralistic political institutions of parliamentary England
would permit. Second, over the next half century, technological
innovations in the manufacture of cotton cloth would play a central
role in the Industrial Revolution and fundamentally transform society
by introducing the factory system.

After 1688, though domestically a level playing field emerged,
internationally Parliament strove to tilt it. This was evident not only
from the Calicoe Acts but also from the Navigation Acts, the first of
which was passed in 1651, and they remained in force with
alternations for the next two hundred years. The aim of these acts
was to facilitate England’s monopolization of international trade —
though crucially this was monopolization not by the state but by the
private sector. The basic principle was that English trade should be
carried in English ships. The acts made it illegal for foreign ships to
transport goods from outside Europe to England or its colonies, and it
was similarly illegal for third-party countries’ ships to ship goods
from a country elsewhere in Europe to England. This advantage for
English traders and manufacturers naturally increased their profits
and may have further encouraged innovation in these new and highly
profitable activities.

By 1760 the combination of all these factors — improved and new
property rights, improved infrastructure, a changed fiscal regime,
greater access to finance, and aggressive protection of traders and
manufacturers — was beginning to have an effect. After this date, there
was a jump in the number of patented inventions, and the great
flowering of technological change that was to be at the heart of the
Industrial Revolution began to be evident. Innovations took place on
many fronts, reflecting the improved institutional environment. One
crucial area was power, most famously the transformations in the use
of the steam engine that were a result of James Watt’s ideas in the
1760s.

Watt’s initial breakthrough was to introduce a separate condensing
chamber for the steam so that the cylinder that housed the piston
could be kept continually hot, instead of having to be warmed up and
cooled down. He subsequently developed many other ideas, including
much more efficient methods of converting the motion of the steam
engine into useful power, notably his “sun and planets” gear system.
In all these areas technological innovations built on earlier work by
others. In the context of the steam engine, this included early work by
English inventor Thomas Newcomen and also by Dionysius Papin, a
French physicist and inventor.

The story of Papin’s invention is another example of how, under
extractive institutions, the threat of creative destruction impeded
technological change. Papin developed a design for a “steam digester”
in 1679, and in 1690 he extended this into a piston engine. In 1705
he used this rudimentary engine to build the world’s first steamboat.
Papin was by this time a professor of mathematics at the University of
Marburg, in the German state of Kassel. He decided to steam the boat
down the river Fulda to the river Weser. Any boat making this trip
was forced to stop at the city of Miinden. At that time, river traffic on
the Fulda and Weser was the monopoly of a guild of boatmen. Papin
must have sensed that there might be trouble. His friend and mentor,
the famous German physicist Gottfried Leibniz, wrote to the Elector of
Kassel, the head of state, petitioning that Papin should be allowed to
"... pass unmolested ...” through Kassel. Yet Leibniz’s petition was

rebuffed and he received the curt answer that “the Electoral
Councillors have found serious obstacles in the way of granting the
above petition, and, without giving their reasons, have directed me to
inform you of their decision, and that in consequence the request is
not granted by his Electoral Highness.” Undeterred, Papin decided to
make the journey anyway. When his steamer arrived at Miinden, the
boatmen’s guild first tried to get a local judge to impound the ship,
but was unsuccessful. The boatmen then set upon Papin’s boat and
smashed it and the steam engine to pieces. Papin died a pauper and
was buried in an unmarked grave. In Tudor or Stuart England, Papin
might have received similar hostile treatment, but this all changed
after 1688. Indeed, Papin was intending to sail his boat to London
before it was destroyed.

In metallurgy, key contributions were made in the 1780s by Henry
Cort, who introduced new techniques for dealing with impurities in
iron, allowing for a much better quality wrought iron to be produced.
This was critical for the manufacture of machine parts, nails, and
tools. The production of vast quantities of wrought iron using Cort’s
techniques was facilitated by the innovations of Abraham Darby and
his sons, who pioneered the use of coal to smelt iron beginning in
1709. This process was enhanced in 1762 by the adaptation, by John
Smeaton, of water power to operate blowing cylinders in making
coke. After this, charcoal vanished from the production of iron, to be
replaced by coal, which was much cheaper and more readily
available.

Even though innovation is obviously cumulative, there was a
distinct acceleration in the middle of the eighteenth century. In no
place was this more visible than in textile production. The most basic
operation in the production of textiles is spinning, which involves
taking plant or animal fibers, such as cotton or wool, and twisting
them together to form yarn. This yarn is then woven to make up
textiles. One of the great technological innovations of the medieval
period was the spinning wheel, which replaced hand spinning. This
invention appeared around 1280 in Europe, probably disseminating
from the Middle East. The methods of spinning did not change until

the eighteenth century. Significant innovations began in 1738, when
Lewis Paul patented a new method of spinning using rollers to replace
human hands to draw out the fibers being spun. The machine did not
work well, however, and it was the innovations of Richard Arkwright
and James Hargreaves that truly revolutionized spinning.

In 1769 Arkwright, one of the dominant figures of the Industrial
Revolution, patented his “water frame,” which was a huge
improvement over Lewis’s machine. He formed a partnership with
Jedediah Strutt and Samuel Need, who were hosiery manufacturers.
In 1771 they built one of the world’s first factories, at Cromford. The
new machines were powered by water, but Arkwright later made the
crucial transition to steam power. By 1774 his firm employed six
hundred workers, and he expanded aggressively, eventually setting up
factories in Manchester, Matlock, Bath, and New Lanark in Scotland.
Arkwright’s innovations were complemented by Hargreaves’s
invention in 1764 of the spinning jenny, which was further developed
by Samuel Crompton in 1779 into the “mule,” and later by Richard
Roberts into the “self-acting mule.” The effects of these innovations
were truly revolutionary: earlier in the century, it took 50,000 hours
for hand spinners to spin one hundred pounds of cotton. Arkwright’s
water frame could do it in 300 hours, and the self-acting mule in 135.

Along with the mechanization of spinning came the mechanization
of weaving. An important first step was the invention of the flying
shuttle by John Kay in 1733. Though it initially simply increased the
productivity of hand weavers, its most enduring impact would be in
opening the way to mechanized weaving. Building on the flying
shuttle, Edmund Cartwright introduced the power loom in 1785, a
first step in a series of innovations that would lead to machines
replacing manual skills in weaving as they were also doing in
spinning.

The English textile industry not only was the driving force behind
the Industrial Revolution but also revolutionized the world economy.
English exports, led by cotton textiles, doubled between 1780 and
1800. It was the growth in this sector that pulled ahead the whole
economy. The combination of technological and organizational

innovation provides the model for economic progress that
transformed the economies of the world that became rich.

New people with new ideas were crucial to this transformation.
Consider innovation in transportation. In England there were several
waves of such innovations: first canals, then roads, and finally
railways. In each of these waves the innovators were new men. Canals
started to develop in England after 1770, and by 1810 they had
linked up many of the most important manufacturing areas. As the
Industrial Revolution unfolded, canals played an important role in
reducing transportation costs for moving around the bulky new
finished industrial goods, such as cotton textiles, and the inputs that
went into them, particularly raw cotton and coal for the steam
engines. Early innovators in building canals were men such as James
Brindley, who was employed by the Duke of Bridgewater to build the
Bridgewater Canal, which ended up linking the key industrial city of
Manchester to the port of Liverpool. Born in rural Derbyshire,
Brindley was a millwright by profession. His reputation for finding
creative solutions to engineering problems came to the attention of
the duke. He had no previous experience with transportation
problems, which also was true of other great canal engineers such as
Thomas Telford, who started life as a stonemason, or John Smeaton,
an instrument maker and engineer.

Just as the great canal engineers had no previous connection to
transportation, neither did the great road and railway engineers. John
Me Adam, who invented tarmac around 1816, was the second son of a
minor aristocrat. The first steam train was built by Richard Trevithick
in 1804. Trevithick’s father was involved in mining in Cornwall, and
Richard entered the same business at an early age, becoming
fascinated by steam engines used for pumping out the mines. More
significant were the innovations of George Stephenson, the son of
illiterate parents and the inventor of the famous train “The Rocket,”
who began work as an engineman at a coal mine.

New men also drove the critical cotton textile industry. Some of the
pioneers of this new industry were people who had previously been
heavily involved in the production and trade of woolen cloths. John

Foster, for example, employed seven hundred handloom weavers in
the woolen industry at the time he switched to cotton and opened
Black Dyke Mills in 1835. But men such as Foster were a minority.
Only about one-fifth of the leading industrialists at this time had
previously been involved in anything like manufacturing activities.
This is not surprising. For one, the cotton industry developed in new
towns in the north of England. Factories were a completely new way
of organizing production. The woolen industry had been organized in
a very different way, by “putting out” materials to individuals in their
homes, who spun and wove on their own. Most of those in the woolen
industry were therefore ill equipped to switch to cotton, as Foster did.
Newcomers were needed to develop and use the new technologies.
The rapid expansion of cotton decimated the wool industry — creative
destruction in action.

Creative destruction redistributes not simply income and wealth,
but also political power, as William Lee learned when he found the
authorities so unreceptive to his invention because they feared its
political consequences. As the industrial economy expanded in
Manchester and Birmingham, the new factory owners and middle-
class groups that emerged around them began to protest their
disenfranchisement and the government policies opposed to their
interests. Their prime candidate was the Corn Laws, which banned
the import of “corn” — all grains and cereals, but principally wheat — if
the price got too low, thus ensuring that the profits of large
landowners were kept high. This policy was very good for big
landowners who produced wheat, but bad for manufacturers, because
they had to pay higher wages to compensate for the high price of
bread.

With workers concentrated into new factories and industrial
centers, it became easier to organize and riot. By the 1820s, the
political exclusion of the new manufacturers and manufacturing
centers was becoming untenable. On August 16, 1819, a meeting to
protest the political system and the policies of the government was
planned to be held in St. Peter’s Fields, Manchester. The organizer
was Joseph Johnson, a local brush manufacturer and one of the

founders of the radical newspaper the Manchester Observer. Other
organizers included John Knight, a cotton manufacturer and
reformer, and John Thacker Saxton, editor of the Manchester Observer.
Sixty thousand protestors gathered, many holding banners such as
“No Corn Laws,” “Universal Suffrage,” and “Vote by Ballot” (meaning
voting should take place secretly, not openly, as it did in 1819). The
authorities were very nervous about the meeting, and a force of six
hundred cavalry of the Fifteenth Hussars had been assembled. As the
speeches began, a local magistrate decided to issue a warrant for the
arrest of the speakers. As police tried to enforce the warrant, they met
with the opposition of the crowd, and fighting broke out. At this point
the Hussars charged the crowd. Within a few chaotic minutes, eleven
people were dead and probably six hundred wounded. The Manchester
Observer called it the Peterloo Massacre.

But given the changes that had already taken place in economic
and political institutions, long-run repression was not a solution in
England. The Peterloo Massacre would remain an isolated incident.
Following the riot, the political institutions in England gave way to
the pressure, and the destabilizing threat of much wider social unrest,
particularly after the 1830 revolution in France against Charles X,
who had tried to restore the absolutism destroyed by the French
Revolution of 1789. In 1832 the government passed the First Reform
Act. It enfranchised Birmingham, Leeds, Manchester, and Sheffield,
and broadened the base of voting so that manufacturers could be
represented in Parliament. The consequent shift in political power
moved policy in the direction favored by these newly represented
interests; in 1846 they managed to get the hated Corn Laws repealed,
demonstrating again that creative destruction meant a redistribution
not just of income, but also of political power. And naturally, changes
in the distribution of political power in time would lead to a further
redistribution of income.

It was the inclusive nature of English institutions that allowed this
process to take place. Those who suffered from and feared creative
destruction were no longer able to stop it.

Why in England?

The Industrial Revolution started and made its biggest strides in
England because of her uniquely inclusive economic institutions.
These in turn were built on foundations laid by the inclusive political
institutions brought about by the Glorious Revolution. It was the
Glorious Revolution that strengthened and rationalized property
rights, improved financial markets, undermined state-sanctioned
monopolies in foreign trade, and removed the barriers to the
expansion of industry. It was the Glorious Revolution that made the
political system open and responsive to the economic needs and
aspirations of society. These inclusive economic institutions gave men
of talent and vision such as James Watt the opportunity and incentive
to develop their skills and ideas and influence the system in ways that
benefited them and the nation. Naturally these men, once they had
become successful, had the same urges as any other person. They
wanted to block others from entering their businesses and competing
against them and feared the process of creative destruction that might
put them out of business, as they had previously bankrupted others.
But after 1688 this became harder to accomplish. In 1775 Richard
Arkwright took out an encompassing patent that he hoped would give
him a monopoly on the rapidly expanding cotton spinning industry in
the future. He could not get the courts to enforce it.

Why did this unique process start in England and why in the
seventeenth century? Why did England develop pluralistic political
institutions and break away from extractive institutions? As we have
seen, the political developments leading up to the Glorious
Revolution were shaped by several interlinked processes. Central was
the political conflict between absolutism and its opponents. The
outcome of this conflict not only put a stop to the attempts to create a
renewed and stronger absolutism in England, but also empowered
those wishing to fundamentally change the institutions of society. The
opponents of absolutism did not simply attempt to build a different
type of absolutism. This was not simply the House of Lancaster
defeating the House of York in the War of the Roses. Instead, the

Glorious Revolution involved the emergence of a new regime based
on constitutional rule and pluralism.

This outcome was a consequence of the drift in English institutions
and the way they interacted with critical junctures. We saw in the
previous chapter how feudal institutions were created in Western
Europe after the collapse of the Western Roman Empire. Feudalism
spread throughout most of Europe, West and East. But as chapter 4
showed, Western and Eastern Europe began to diverge radically after
the Black Death. Small differences in political and economic
institutions meant that in the West the balance of power led to
institutional improvement; in the East, to institutional deterioration.
But this was not a path that would necessarily and inexorably lead to
inclusive institutions. Many more crucial turns would have to be
taken on the way. Though the Magna Carta had attempted to
establish some basic institutional foundations for constitutional rule,
many other parts of Europe, even Eastern Europe, saw similar
struggles with similar documents. Yet, after the Black Death, Western
Europe significantly drifted away from the East. Documents such as
the Magna Carta started to have more bite in the West. In the East,
they came to mean little. In England, even before the conflicts of the
seventeenth century, the norm was established that the king could not
raise new taxes without the consent of Parliament. No less important
was the slow, incremental drift of power away from elites to citizens
more generally, as exemplified by the political mobilization of rural
communities, seen in England with such moments as the Peasants’
Revolt of 1381.

This drift of institutions now interacted with another critical
juncture caused by the massive expansion of trade into the Atlantic.
As we saw in chapter 4, one crucial way in which this influenced
future institutional dynamics depended on whether or not the Crown
was able to monopolize this trade. In England the somewhat greater
power of Parliament meant that the Tudor and Stuart monarchs could
not do so. This created a new class of merchants and businessmen,
who aggressively opposed the plan to create absolutism in England.
By 1686 in London, for example, there were 702 merchants exporting

to the Caribbean and 1,283 importing. North America had 691
exporting and 626 importing merchants. They employed
warehousemen, sailors, captains, dockworkers, clerks — all of whom
broadly shared their interests. Other vibrant ports, such as Bristol,
Liverpool, and Portsmouth, were similarly full of such merchants.
These new men wanted and demanded different economic
institutions, and as they got wealthier through trade, they became
more powerful. The same forces were at work in France, Spain, and
Portugal. But there the kings were much more able to control trade
and its profits. The type of new group that was to transform England
did emerge in those countries, but was considerably smaller and
weaker.

When the Long Parliament sat and the Civil War broke out in 1642,
these merchants primarily sided with the parliamentary cause. In the
1670s they were heavily involved in the formation of the Whig Party,
to oppose Stuart absolutism, and in 1688 they would be pivotal in
deposing James II. So the expanding trade opportunities presented by
the Americas, the mass entry of English merchants into this trade and
the economic development of the colonies, and the fortunes they
made in the process, tipped the balance of power in the struggle
between the monarchy and those opposed to absolutism.

Perhaps most critically, the emergence and empowerment of
diverse interests — ranging from the gentry, a class of commercial
farmers that had emerged in the Tudor period, to different types of
manufacturers to Atlantic traders — meant that the coalition against
Stuart absolutism was not only strong but also broad. This coalition
was strengthened even more by the formation of the Whig Party in
the 1670s, which provided an organization to further its interests. Its
empowerment was what underpinned pluralism following the
Glorious Revolution. If all those fighting against the Stuarts had the
same interests and the same background, the overthrow of the Stuart
monarchy would have been much more likely to be a replay of the
House of Lancaster versus the House of York, pitting one group
against another narrow set of interests, and ultimately replacing and
re-creating the same or a different form of extractive institutions. A

broad coalition meant that there would be greater demands for the
creation of pluralist political institutions. Without some sort of
pluralism, there would be a danger that one of the diverse interests
would usurp power at the expense of the rest. The fact that
Parliament after 1688 represented such a broad coalition was a
crucial factor in making members of Parliament listen to petitions,
even when they came from people outside of Parliament and even
from those without a vote. This was a crucial factor in preventing
attempts by one group to create a monopoly at the expense of the
rest, as wool interests tried to do before the Manchester Act.

The Glorious Revolution was a momentous event precisely because
it was led by an emboldened broad coalition and further empowered
this coalition, which managed to forge a constitutional regime with
constraints on the power of both the executive and, equally crucially,
any one of its members. It was, for example, these constraints that
prevented the wool manufacturers from being able to crush the
potential competition from the cotton and fustian manufacturers.
Thus this broad coalition was essential in the lead-up to a strong
Parliament after 1688, but it also meant that there were checks
within Parliament against any single group becoming too powerful
and abusing its power. It was the critical factor in the emergence of
pluralistic political institutions. The empowerment of such a broad
coalition also played an important role in the persistence and
strengthening of these inclusive economic and political institutions, as
we will see in chapter 1 1 .

Still none of this made a truly pluralistic regime inevitable, and its
emergence was in part a consequence of the contingent path of
history. A coalition that was not too different was able to emerge
victorious from the English Civil War against the Stuarts, but this only
led to Oliver Cromwell’s dictatorship. The strength of this coalition
was also no guarantee that absolutism would be defeated. James II
could have defeated William of Orange. The path of major
institutional change was, as usual, no less contingent than the
outcome of other political conflicts. This was so even if the specific
path of institutional drift that created the broad coalition opposed to

absolutism and the critical juncture of Atlantic trading opportunities
stacked the cards against the Stuarts. In this instance, therefore,
contingency and a broad coalition were deciding factors underpinning
the emergence of pluralism and inclusive institutions.

8 .

NOT ON OUR TURF: BARRIERS TO DEVELOPMENT

No Printing Allowed

In 1445 in the German city of Mainz, Johannes Gutenberg unveiled an

innovation with profound consequences for subsequent economic
history: a printing press based on movable type. Until then, books
either had to be hand-copied by scribes, a very slow and laborious
process, or they were block-printed with specific pieces of wood cut
for printing each page. Books were few and far between, and very
expensive. After Gutenberg’s invention, things began to change. Books
were printed and became more readily available. Without this
innovation, mass literacy and education would have been impossible.

In Western Europe, the importance of the printing press was
quickly recognized. In 1460 there was already a printing press across
the border, in Strasbourg, France. By the late 1460s the technology
had spread throughout Italy, with presses in Rome and Venice, soon
followed by Florence, Milan, and Turin. By 1476 William Caxton had
set up a printing press in London, and two years later there was one
in Oxford. During the same period, printing spread throughout the
Low Countries, into Spain, and even into Eastern Europe, with a press
opening in Budapest in 1473 and in Cracow a year later.

Not everyone saw printing as a desirable innovation. As early as
1485 the Ottoman sultan Bayezid II issued an edict that Muslims were
expressly forbidden from printing in Arabic. This rule was further
reinforced by Sultan Selim I in 1515. It was not until 1727 that the
first printing press was allowed in the Ottoman lands. Then Sultan
Ahmed III issued a decree granting ibrahim Miiteferrika permission to
set up a press. Even this belated step was hedged with restraints.

Though the decree noted “the fortunate day this Western technique
will be unveiled like a bride and will not again be hidden,”
Miiteferrika’s printing was going to be closely monitored. The decree
stated:

so that the printed books will be free from printing
mistakes, the wise, respected and meritorious religious
scholars specializing in Islamic Law, the excellent Kadi of
Istanbul, Mevlana ishak, and Selaniki’s Kadi, Mevlana
Sahib, and Galata’s Kadi, Mevlana Asad, may their merits
be increased, and from the illustrious religious orders, the
pillar of the righteous religious scholars, the Sheykh of the
Kasim Pa§a Mevlevihane, Mevlana Musa, may his wisdom
and knowledge increase, will oversee the proofreading.

Miiteferrika was allowed to set up a printing press, but whatever he
printed had to be vetted by a panel of three religious and legal
scholars, the Kadis. Maybe the wisdom and knowledge of the Kadis,
like everybody else’s, would have increased much faster had the
printing press been more readily available. But that was not to be,
even after Miiteferrika was given permission to set up his press.

Not surprisingly Miiteferrika printed few books in the end, only
seventeen between 1729, when the press began to operate, and 1743,
when he stopped working. His family tried to continue the tradition,
but they managed to print only another seven books by the time they
finally gave up in 1797. Outside of the core of the Ottoman Empire in
Turkey, printing lagged even further behind. In Egypt, for instance,
the first printing press was set up only in 1798, by Frenchmen who
were part of the abortive attempt by Napoleon Bonaparte to capture
the country. Until well into the second half of the nineteenth century,
book production in the Ottoman Empire was still primarily
undertaken by scribes hand-copying existing books. In the early
eighteenth century, there were reputed to be eighty thousand such
scribes active in Istanbul.

This opposition to the printing press had the obvious consequences

for literacy, education, and economic success. In 1800 probably only
2 to 3 percent of the citizens of the Ottoman Empire were literate,
compared with 60 percent of adult males and 40 percent of adult
females in England. In the Netherlands and Germany, literacy rates
were even higher. The Ottoman lands lagged far behind the European
countries with the lowest educational attainment in this period, such
as Portugal, where probably only around 20 percent of adults could
read and write.

Given the highly absolutist and extractive Ottoman institutions, the
sultan’s hostility to the printing press is easy to understand. Books
spread ideas and make the population much harder to control. Some
of these ideas may be valuable new ways to increase economic
growth, but others may be subversive and challenge the existing
political and social status quo. Books also undermine the power of
those who control oral knowledge, since they make that knowledge
readily available to anyone who can master literacy. This threatened
to undermine the existing status quo, where knowledge was
controlled by elites. The Ottoman sultans and religious establishment
feared the creative destruction that would result. Their solution was
to forbid printing.

The Industrial Revolution created a critical juncture that affected almost
every country. Some nations, such as England, not only allowed, but
actively encouraged, commerce, industrialization, and
entrepreneurship, and grew rapidly. Many, such as the Ottoman
Empire, China, and other absolutist regimes, lagged behind as they
blocked or at the very least did nothing to encourage the spread of
industry. Political and economic institutions shaped the response to
technological innovation, creating once again the familiar pattern of
interaction between existing institutions and critical junctures leading
to divergence in institutions and economic outcomes.

The Ottoman Empire remained absolutist until it collapsed at the
end of the First World War, and was thus able to successfully oppose
or impede innovations such as the printing press and the creative

destruction that would have resulted. The reason that the economic
changes that took place in England did not happen in the Ottoman
Empire is the natural connection between extractive, absolutist
political institutions and extractive economic institutions. Absolutism
is rule unconstrained by law or the wishes of others, though in reality
absolutists rule with the support of some small group or elite. In
nineteenth-century Russia, for example, the tsars were absolutist
rulers supported by a nobility that represented about 1 percent of the
total population. This narrow group organized political institutions to
perpetuate their power. There was no Parliament or political
representation of other groups in Russian society until 1905, when
the tsar created the Duma, though he quickly undermined what few
powers he had given to it. Unsurprisingly, economic institutions were
extractive, organized to make the tsar and nobility as wealthy as
possible. The basis of this, as of many extractive economic systems,
was a mass system of labor coercion and control, in the particularly
pernicious form of Russian serfdom.

Absolutism was not the only type of political institution preventing
industrialization. Though absolutist regimes were not pluralistic and
feared creative destruction, many had centralized states, or at least
states that were centralized enough to impose bans on innovations
such as the printing press. Even today, countries such as Afghanistan,
Haiti, and Nepal have national states that lack political centralization.
In sub-Saharan Africa the situation is even worse. As we argued
earlier, without a centralized state to provide order and enforce rules
and property rights, inclusive institutions could not emerge. We will
see in this chapter that in many parts of sub-Saharan Africa (for
example, Somalia and southern Sudan) a major barrier to
industrialization was the lack of any form of political centralization.
Without these natural prerequisites, industrialization had no chance
of getting off the ground.

Absolutism and a lack of, or weak, political centralization are two
different barriers to the spread of industry. But they are also
connected; both are kept in place by fear of creative destruction and
because the process of political centralization often creates a tendency

toward absolutism. Resistance to political centralization is motivated
by reasons similar to resistance to inclusive political institutions: fear
of losing political power, this time to the newly centralizing state and
those who control it. We saw in the previous chapter how the process
of political centralization under the Tudor monarchy in England
increased demands for voice and representation by different local
elites in national political institutions as a way of staving off this loss
of political power. A stronger Parliament was created, ultimately
enabling the emergence of inclusive political institutions.

But in many other cases, just the opposite takes place, and the
process of political centralization also ushers in an era of greater
absolutism. This is illustrated by the origins of Russian absolutism,
which was forged by Peter the Great between 1682 and his death in
1725. Peter built a new capital at Saint Petersburg, stripping away
power from the old aristocracy, the Boyars, in order to create a
modern bureaucratic state and modern army. He even abolished the
Boyar Duma that had made him tsar. Peter introduced the Table of
Ranks, a completely new social hierarchy whose essence was service
to the tsar. He also took control over the Church, just as Henry VIII
did when centralizing the state in England. With this process of
political centralization, Peter was taking power away from others and
redirecting it toward himself. His military reforms led the traditional
royal guards, the Streltsy, to rebel. Their revolt was followed by
others, such as the Bashkirs in Central Asia and the Bulavin Rebellion.
None succeeded.

Though Peter the Great’s project of political centralization was a
success and the opposition was overcome, the type of forces that
opposed state centralization, such as the Streltsy, who saw their
power being challenged, won out in many parts of the world, and the
resulting lack of state centralization meant the persistence of a
different type of extractive political institutions.

In this chapter, we will see how during the critical juncture created
by the Industrial Revolution, many nations missed the boat and failed
to take advantage of the spread of industry. Either they had absolutist
political and extractive economic institutions, as in the Ottoman

Empire, or they lacked political centralization, as in Somalia.

A Small Difference That Mattered

Absolutism crumbled in England during the seventeenth century but
got stronger in Spain. The Spanish equivalent of the English
Parliament, the Cortes, existed in name only. Spain was forged in
1492 with the merger of the kingdoms of Castile and Aragon via the
marriage of Queen Isabella and King Ferdinand. That date coincided
with the end of the Reconquest, the long process of ousting the Arabs
who had occupied the south of Spain, and built the great cities of
Granada, Cordova, and Seville, since the eighth century. The last Arab
state on the Iberian Peninsula, Granada, fell to Spain at the same time
Christopher Columbus arrived in the Americas and started claiming
lands for Queen Isabella and King Ferdinand, who had funded his
voyage.

The merger of the crowns of Castile and Aragon and subsequent
dynastic marriages and inheritances created a European superstate.
Isabella died in 1504, and her daughter Joanna was crowned queen of
Castile. Joanna was married to Philip of the House of Habsburg, the
son of the emperor of the Holy Roman Empire, Maximilian I. In 1516
Charles, Joanna and Philip’s son, was crowned Charles I of Castile
and Aragon. When his father died, Charles inherited the Netherlands
and Franche-Comte, which he added to his territories in Iberia and
the Americas. In 1519, when Maximilian I died, Charles also inherited
the Habsburg territories in Germany and became Emperor Charles V
of the Holy Roman Empire. What had been a merger of two Spanish
kingdoms in 1492 became a multicontinental empire, and Charles
continued the project of strengthening the absolutist state that
Isabella and Ferdinand had begun.

The effort to build and consolidate absolutism in Spain was
massively aided by the discovery of precious metals in the Americas.
Silver had already been discovered in large quantities in Guanajuato,
in Mexico, by the 1520s, and soon thereafter in Zacatecas, Mexico.
The conquest of Peru after 1532 created even more wealth for the

monarchy. This came in the form of a share, the “royal fifth,” in any
loot from conquest and also from mines. As we saw in chapter 1, a
mountain of silver was discovered in Potosi by the 1540s, pouring
more wealth into the coffers of the Spanish king.

At the time of the merger of Castile and Aragon, Spain was among
the most economically successful parts of Europe. After its absolutist
political system solidified, it went into relative and then, after 1600,
absolute economic decline. Almost the first acts of Isabella and
Ferdinand after the Reconquest was the expropriation of the Jews.
The approximately two hundred thousand Jews in Spain were given
four months to leave. They had to sell off all their land and assets at
very low prices and were not allowed to take any gold or silver out of
the country. A similar human tragedy was played out just over one
hundred years later. Between 1609 and 1614, Philip III expelled the
Moriscos, the descendants of the citizens of the former Arab states in
the south of Spain. Just as with the Jews, the Moriscos had to leave
with only what they could carry and were not allowed to take with
them any gold, silver, or other precious metals.

Property rights were insecure in other dimensions under Habsburg
rule in Spain. Philip II, who succeeded his father, Charles V, in 1556,
defaulted on his debts in 1557 and again in 1560, ruining the Fugger
and Welser banking families. The role of the German banking families
was then assumed by Genoese banking families, who were in turn
ruined by subsequent Spanish defaults during the reign of the
Habsburgs in 1575, 1596, 1607, 1627, 1647, 1652, 1660, and 1662.

Just as crucial as the instability of property rights in absolutist
Spain was the impact of absolutism on the economic institutions of
trade and the development of the Spanish colonial empire. As we saw
in the previous chapter, the economic success of England was based
on rapid mercantile expansion. Though, compared with Spain and
Portugal, England was a latecomer to Atlantic trade, she allowed for
relatively broad-based participation in trading and colonial
opportunities. What filled the Crown’s coffers in Spain enriched the
newly emerging merchant class in England. It was this merchant class
that would form the basis of early England economic dynamism and

become the bulwark of the anti-absolutist political coalition.

In Spain these processes that led to economic progress and
institutional change did not take place. After the Americas had been
discovered, Isabella and Ferdinand organized trade between their new
colonies and Spain via a guild of merchants in Seville. These
merchants controlled all trade and made sure that the monarchy got
its share of the wealth of the Americas. There was no free trade with
any of the colonies, and each year a large flotilla of ships would
return from the Americas bringing precious metals and valuable
goods to Seville. The narrow, monopolized base of this trade meant
that no broad class of merchants could emerge via trading
opportunities with the colonies. Even trade within the Americas was
heavily regulated. For example, a merchant in a colony such as New
Spain, roughly modern Mexico, could not trade directly with anyone
in New Granada, modern Colombia. These restrictions on trade within
the Spanish Empire reduced its economic prosperity and also,
indirectly, the potential benefits that Spain could have gained by
trading with another, more prosperous empire. Nevertheless, they
were attractive because they guaranteed that the silver and gold
would keep flowing to Spain.

The extractive economic institutions of Spain were a direct result of
the construction of absolutism and the different path, compared with
England, taken by political institutions. Both the Kingdom of Castile
and the Kingdom of Aragon had their Cortes, a parliament
representing the different groups, or “estates,” of the kingdom. As
with the English Parliament, the Castilian Cortes needed to be
summoned to assent to new taxes. Nevertheless, the Cortes in Castile
and Aragon primarily represented the major cities, rather than both
the urban and rural areas, as the English Parliament did. By the
fifteenth century, it represented only eighteen cities, each of whom
sent two deputies. In consequence, the Cortes did not represent as
broad a set of groups as the English Parliament did, and it never
developed as a nexus of diverse interests vying to place constraints on
absolutism. It could not legislate, and even the scope of its powers
with respect to taxation was limited. This all made it easier for the

Spanish monarchy to sideline the Cortes in the process of
consolidating its own absolutism. Even with silver coming from the
Americas, Charles V and Philip II required ever-increasing tax
revenues to finance a series of expensive wars. In 1520 Charles V
decided to present the Cortes with demands for increased taxation.
Urban elites used the moment to call for much wider change in the
Cortes and its powers. This opposition turned violent and quickly
became known as the Comunero Rebellion. Charles was able to crush
the rebellion with loyal troops. Throughout the rest of the sixteenth
century, though, there was a continuous battle as the Crown tried to
wrest away from the Cortes what rights to levy new taxes and
increase old ones that it had. Though this battle ebbed and flowed, it
was ultimately won by the monarchy. After 1664 the Cortes did not
meet again until it would be reconstructed during the Napoleonic
invasions almost 150 years later.

In England the defeat of absolutism in 1688 led not only to
pluralistic political institutions but also to the further development of
a much more effective centralized state. In Spain the opposite
happened as absolutism triumphed. Though the monarchy
emasculated the Cortes and removed any potential constraints on its
behavior, it became increasingly difficult to raise taxes, even when
attempted by direct negotiations with individual cities. While the
English state was creating a modern, efficient tax bureaucracy, the
Spanish state was again moving in the opposite direction. The
monarchy was not only failing to create secure property rights for
entrepreneurs and monopolizing trade, but it was also selling offices,
often making them hereditary, indulging in tax farming, and even
selling immunity from justice.

The consequences of these extractive political and economic
institutions in Spain were predictable. During the seventeenth
century, while England was moving toward commercial growth and
then rapid industrialization, Spain was tailspinning toward
widespread economic decline. At the start of the century, one in five
people in Spain was living in urban areas. By the end, this figure had
halved to one in ten, in a process that corresponded to increasing

impoverishment of the Spanish population. Spanish incomes fell,
while England grew rich.

The persistence and the strengthening of absolutism in Spain, while
it was being uprooted in England, is another example of small
differences mattering during critical junctures. The small differences
were in the strengths and nature of representative institutions; the
critical juncture was the discovery of the Americas. The interaction of
these sent Spain off on a very different institutional path from
England. The relatively inclusive economic institutions that resulted
in England created unprecedented economic dynamism, culminating
in the Industrial Revolution, while industrialization did not stand a
chance in Spain. By the time industrial technology was spreading in
many parts of the world, the Spanish economy had declined so much
that there was not even a need for the Crown or the land-owning
elites in Spain to block industrialization.

Fear of Industry

Without the changes in political institutions and political power
similar to those that emerged in England after 1688, there was little
chance for absolutist countries to benefit from the innovations and
new technologies of the Industrial Revolution. In Spain, for example,
the lack of secure property rights and the widespread economic
decline meant that people simply did not have the incentive to make
the necessary investments and sacrifices. In Russia and Austria-
Hungary, it wasn’t simply the neglect and mismanagement of the
elites and the insidious economic slide under extractive institutions
that prevented industrialization; instead, the rulers actively blocked
any attempt to introduce these technologies and basic investments in
infrastructure such as railroads that could have acted as their
conduits.

At the time of the Industrial Revolution, in the eighteenth and early
nineteenth centuries, the political map of Europe was quite different
from how it is today. The Holy Roman Empire, a patchwork quilt of
more than four hundred polities, most of which would eventually

coalesce into Germany, occupied most of Central Europe. The House
of Habsburg was still a major political force, and its empire, known as
the Habsburg or Austro-Hungarian Empire, spread over a vast area of
around 250,000 square miles, even if it no longer included Spain,
after the Bourbons had taken over the Spanish throne in 1700. In
terms of population, it was the third-largest state in Europe and
comprised one-seventh of the population of Europe. In the late
eighteenth century the Habsburg lands included, in the west, what is
today Belgium, then known as the Austrian Netherlands. The largest
part, however, was the contiguous block of lands based around
Austria and Hungary, including the Czech Republic and Slovakia to
the north, and Slovenia, Croatia, and large parts of Italy and Serbia to
the south. To the east it also incorporated much of what is today
Romania and Poland.

Merchants in the Habsburg domains were much less important than
in England, and serfdom prevailed in the lands in Eastern Europe. As
we saw in chapter 4, Hungary and Poland were at the heart of the
Second Serfdom of Eastern Europe. The Habsburgs, unlike the Stuarts,
were successful in sustaining strongly absolutist rule. Francis I, who
ruled as the last emperor of the Holy Roman Empire, between 1792
and 1806, and then emperor of Austria-Hungary until his death in
1835, was a consummate absolutist. He did not recognize any
limitations on his power and, above all, he wished to preserve the
political status quo. His basic strategy was opposing change, any sort
of change. In 1821 he made this clear in a speech, characteristic of
Habsburg rulers, he gave to the teachers at a school in Laibach,
asserting, “I do not need savants, but good, honest citizens. Your task
is to bring young men up to be this. He who serves me must teach
what I order him. If anyone can’t do this, or comes with new ideas, he
can go, or I will remove him.”

The empress Maria Theresa, who reigned between 1740 and 1780,
frequently responded to suggestions about how to improve or change
institutions by remarking. “Leave everything as it is.” Nevertheless,
she and her son Joseph II, who was emperor between 1780 and 1790,
were responsible for an attempt to construct a more powerful central

state and more effective administrative system. Yet they did this in
the context of a political system with no real constraints on their
actions and with few elements of pluralism. There was no national
parliament that would exert even a modicum of control on the
monarch, only a system of regional estates and diets, which
historically had some powers with respect to taxation and military
recruitment. There were even fewer controls on what the Austro-
Hungarian Habsburgs could do than there were on Spanish monarchs,
and political power was narrowly concentrated.

As Habsburg absolutism strengthened in the eighteenth century, the
power of all non-monarchical institutions weakened further. When a
deputation of citizens from the Austrian province of the Tyrol
petitioned Francis for a constitution, he responded, “So, you want a
constitution! ... Now look, I don’t care for it, I will give you a
constitution but you must know that the soldiers obey me, and I will
not ask you twice if I need money ... In any case I advise you to be
careful what you are going to say.” Given this response, the Tyrolese
leaders replied, “If thou thinkest thus, it is better to have no
constitution,” to which Francis answered, “That is also my opinion.”

Francis dissolved the State Council that Maria Theresa had used as
a forum for consultation with her ministers. From then on there
would be no consultation or public discussion of the Crown’s
decisions. Francis created a police state and ruthlessly censored
anything that could be regarded as mildly radical. His philosophy of
rule was characterized by Count Hartig, a long-standing aide, as the
“unabated maintenance of the sovereign’s authority, and a denial of
all claims on the part of the people to a participation in that
authority.” He was helped in all this by Prince von Metternich,
appointed as his foreign minister in 1809. Metternich’s power and
influence actually outlasted that of Francis, and he remained foreign
minister for almost forty years.

At the center of Habsburg economic institutions stood the feudal
order and serfdom. As one moved east within the empire, feudalism
became more intense, a reflection of the more general gradient in
economic institutions we saw in chapter 4, as one moved from

Western to Eastern Europe. Labor mobility was highly circumscribed,
and emigration was illegal. When the English philanthropist Robert
Owen tried to convince the Austrian government to adopt some social
reforms in order to ameliorate the conditions of poor people, one of
Metternich’s assistants, Friedrich von Gentz, replied, “We do not
desire at all that the great masses shall become well off and
independent ... How could we otherwise rule over them?”

In addition to serfdom, which completely blocked the emergence of
a labor market and removed the economic incentives or initiative
from the mass of the rural population, Habsburg absolutism thrived
on monopolies and other restrictions on trade. The urban economy
was dominated by guilds, which restricted entry into professions.
Until 1775 there were internal tariffs within Austria itself and in
Hungary until 1784. There were very high tariffs on imported goods,
with many explicit prohibitions on the import and export of goods.

The suppression of markets and the creation of extractive economic
institutions are of course quite characteristic of absolutism, but
Francis went further. It was not simply that extractive economic
institutions removed the incentive for individuals to innovate or
adopt new technology. We saw in chapter 2 how in the Kingdom of
Kongo attempts to promote the use of plows were unsuccessful
because people lacked any incentive, given the extractive nature of
the economic institutions. The king of Kongo realized that if he could
induce people to use plows, agricultural productivity would be
higher, generating more wealth, which he could benefit from. This is
a potential incentive for all governments, even absolutist ones. The
problem in Kongo was that people understood that whatever they
produced could be confiscated by an absolutist monarch, and
therefore they had no incentive to invest or use better technology. In
the Habsburg lands, Francis did not encourage his citizens to adopt
better technology; on the contrary, he actually opposed it, and
blocked the dissemination of technologies that people would have
been otherwise willing to adopt with the existing economic
institutions.

Opposition to innovation was manifested in two ways. First, Francis

I was opposed to the development of industry. Industry led to
factories, and factories would concentrate poor workers in cities,
particularly in the capital city of Vienna. Those workers might then
become supporters for opponents of absolutism. His policies were
aimed at locking into place the traditional elites and the political and
economic status quo. He wanted to keep society primarily agrarian.
The best way to do this, Francis believed, was to stop the factories
being built in the first place. This he did directly — for instance, in
1802, banning the creation of new factories in Vienna. Instead of
encouraging the importation and adoption of new machinery, the
basis of industrialization, he banned it until 1811.

Second, he opposed the construction of railways, one of the key
new technologies that came with the Industrial Revolution. When a
plan to build a northern railway was put before Francis I, he replied,
“No, no, I will have nothing to do with it, lest the revolution might
come into the country.”

Since the government would not grant a concession to build a
steam railway, the first railway built in the empire had to use horse-
drawn carriages. The line, which ran between the city of Linz, on the
Danube, to the Bohemian city of Budweis, on the Moldau River, was
built with gradients and corners, which meant that it was impossible
subsequently to convert it to steam engines. So it continued with
horse power until the 1860s. The economic potential for railway
development in the empire had been sensed early by the banker
Salomon Rothschild, the representative in Vienna of the great banking
family. Salomon’s brother Nathan, who was based in England, was
very impressed by George Stephenson’s engine “The Rocket” and the
potential for steam locomotion. He contacted his brother to
encourage him to look for opportunities to develop railways in
Austria, since he believed that the family could make large profits by
financing railway development. Nathan agreed, but the scheme went
nowhere because Emperor Francis again simply said no.

The opposition to industry and steam railways stemmed from
Francis’s concern about the creative destruction that accompanied the
development of a modern economy. His main priorities were ensuring

the stability of the extractive institutions over which he ruled and
protecting the advantages of the traditional elites who supported him.
Not only was there little to gain from industrialization, which would
undermine the feudal order by attracting labor from the countryside
to the cities, but Francis also recognized the threat that major
economic changes would pose to his political power. As a
consequence, he blocked industry and economic progress, locking in
economic backwardness, which manifested itself in many ways. For
instance, as late as 1883, when 90 percent of world iron output was
produced using coal, more than half of the output in the Habsburg
territories still used much less efficient charcoal. Similarly, right up to
the First World War, when the empire collapsed, textile weaving was
never fully mechanized but still undertaken by hand.

Austria-Hungary was not alone in fearing industry. Farther east,
Russia had an equally absolutist set of political institutions, forged by
Peter the Great, as we saw earlier in this chapter. Like Austria-
Hungary, Russia’s economic institutions were highly extractive, based
on serfdom, keeping at least half of the population tied to the land.
Serfs had to work for nothing three days a week on the lands of their
lords. They could not move, they lacked freedom of occupation, and
they could be sold at will by their lord to another lord. The radical
philosopher Peter Kropotkin, one of the founders of modern
anarchism, left a vivid depiction of the way serfdom worked during
the reign of Tsar Nicholas I, who ruled Russia from 1825 until 1855.
He recalled from his childhood

stories of men and women torn from their families and
their villages and sold, lost in gambling, or exchanged for
a couple of hunting dogs, and transported to some remote
part of Russia ... of children taken from their parents and
sold to cruel or dissolute masters; of flogging “in the
stables,” which occurred every day with unheard of
cruelty; of a girl who found her only salvation in drowning
herself; of an old man who had grown grey-haired in his
master’s service and at last hanged himself under his

master’s window; and of revolts of serfs, which were
suppressed by Nicholas I’s generals by flogging to death
each tenth or fifth man taken out of the ranks, and by
laying waste the village ... As to the poverty which I saw
during our journeys in certain villages, especially in those
which belonged to the imperial family, no words would be
adequate to describe the misery to readers who have not
seen it.

Exactly as in Austria-Hungary, absolutism didn’t just create a set of
economic institutions that impeded the prosperity of the society.
There was a similar fear of creative destruction and a fear of industry
and the railways. At the heart of this during the reign of Nicholas I
was Count Egor Kankrin, who served as finance minister between
1823 and 1844 and played a key role in opposing the changes in
society necessary for promoting economic prosperity.

Kankrin’s policies were aimed at strengthening the traditional
political pillars of the regime, particularly the landed aristocracy, and
keeping the society rural and agrarian. Upon becoming minister of
finance, Kankrin quickly opposed and reversed a proposal by the
previous finance minister, Gurev, to develop a government-owned
Commercial Bank to lend to industry. Instead, Kankrin reopened the
State Loan Bank, which had been closed during the Napoleonic Wars.
This bank was originally created to lend to large landowners at
subsidized rates, a policy Kankrin approved of. The loans required the
applicants to put up serfs as “security,” or collateral, so that only
feudal landowners could get such loans. To finance the State Loan
Bank, Kankrin transferred assets from the Commercial Bank, killing
two birds with one stone: there would now be little money left for
industry.

Kankrin’s attitudes were presciently shaped by the fear that
economic change would bring political change, and so were those of
Tsar Nicholas. Nicholas’s assumption of power in December 1825 had
been almost aborted by an attempted coup by military officers, the
so-called Decembrists, who had a radical program of social change.

Nicholas wrote to Grand Duke Mikhail: “Revolution is on Russia’s
doorstep, but I swear that it will not penetrate the country while
there is breath in my body.”

Nicholas feared the social changes that creating a modern economy
would bring. As he put it in a speech he made to a meeting of
manufacturers at an industrial exhibit in Moscow:

both the state and manufacturers must turn their attention
to a subject, without which the very factories would
become an evil rather than a blessing; this is the care of
the workers who increase in number annually. They need
energetic and paternal supervision of their morals; without
it this mass of people will gradually be corrupted and
eventually turn into a class as miserable as they are
dangerous for their masters.

Just as with Francis I, Nicholas feared that the creative destruction
unleashed by a modern industrial economy would undermine the
political status quo in Russia. Urged on by Nicholas, Kankrin took
specific steps to slow the potential for industry. He banned several
industrial exhibitions, which had previously been held periodically to
showcase new technology and facilitate technology adoption.

In 1848 Europe was rocked by a series of revolutionary outbursts.
In response, A. A. Zakrevskii, the military governor of Moscow, who
was in charge of maintaining public order, wrote to Nicholas: “For
the preservation of calm and prosperity, which at present time only
Russia enjoys, the government must not permit the gathering of
homeless and dissolute people, who will easily join every movement,
destroying social or private peace.” His advice was brought before
Nicholas’s ministers, and in 1849 a new law was enacted that put
severe limits on the number of factories that could be opened in any
part of Moscow. It specifically forbade the opening of any new cotton
or woolen spinning mills and iron foundries. Other industries, such as
weaving and dyeing, had to petition the military governor if they
wanted to open new factories. Eventually cotton spinning was

explicitly banned. The law was intended to stop any further
concentration of potentially rebellious workers in the city.

Opposition to railways accompanied opposition to industry, exactly
as in Austria-Hungary. Before 1842 there was only one railway in
Russia. This was the Tsarskoe Selo Railway, which ran seventeen
miles from Saint Petersburg to the imperial residencies of Tsarskoe
Selo and Pavlovsk. Just as Kankrin opposed industry, he saw no
reason to promote railways, which he argued would bring a socially
dangerous mobility, noting that “railways do not always result from
natural necessity, but are more an object of artificial need or luxury.
They encourage unnecessary travel from place to place, which is
entirely typical of our time.”

Kankrin turned down numerous bids to build railways, and it was
only in 1851 that a line was built linking Moscow and Saint
Petersburg. Kankrin’s policy was continued by Count Kleinmichel,
who was made head of the main administration of Transport and
Public Buildings. This institution became the main arbiter of railway
construction, and Kleinmichel used it as a platform to discourage
their construction. After 1849 he even used his power to censor
discussion in the newspapers of railway development.

Finland

Sweden

Norway

Russia

German Realm

Austria-Hun^arian Empire

France

Roma nia^ A
Bulgaria/^

I Ottoman

1870 railroads
1870 boundaries

Map 13: Railroads in Europe in 1870

Map 13 (opposite) shows the consequences of this logic. While
Britain and most of northwest Europe was crisscrossed with railways
in 1870, very few penetrated the vast territory of Russia. The policy
against railways was only reversed after Russia’s conclusive defeat by
British, French, and Ottoman forces in the Crimean War, 1853-1856,
when the backwardness of its transportation network was understood
to be a serious liability for Russian security. There was also little
railway development in Austria-Hungary outside of Austria and the
western parts of the empire, though the 1848 Revolutions had
brought change to these territories, particularly the abolition of
serfdom.

No Shipping Allowed

Absolutism reigned not just in much of Europe but also in Asia, and

similarly prevented industrialization during the critical juncture
created by the Industrial Revolution. The Ming and Qing dynasties of
China and the absolutism of the Ottoman Empire illustrate this
pattern. Under the Song dynasty, between 960 and 1279, China led
the world in many technological innovations. The Chinese invented
clocks, the compass, gunpowder, paper and paper money, porcelain,
and blast furnaces to make cast iron before Europe did. They
independently developed spinning wheels and waterpower at more or
less the same time that these emerged at the other end of Eurasia. In
consequence, in 1500 standards of living were probably at least as
high in China as they were in Europe. For centuries China also had a
centralized state with a meritocratically recruited civil service.

Yet China was absolutist, and the growth under the Song dynasty
was under extractive institutions. There was no political
representation for groups other than the monarchy in society, nothing
resembling a Parliament or a Cortes. Merchants always had a
precarious status in China, and the great inventions of the Song were
not spurred by market incentives but were brought into existence
under the auspices, or even the orders, of the government. Little of
this was commercialized. The grip of the state tightened during the
Ming and Qing dynasties that followed the Song. At the root of all
this was the usual logic of extractive institutions. As most rulers
presiding over extractive institutions, the absolutist emperors of
China opposed change, sought stability, and in essence feared creative
destruction.

This is best illustrated by the history of international trade. As we
have seen, the discovery of the Americas and the way international
trade was organized played a key role in the political conflicts and
institutional changes of early modern Europe. In China, while private
merchants were commonly involved in trade within the country, the
state monopolized overseas trade. When the Ming dynasty came to
power in 1368, it was Emperor Hongwu who first ruled, for thirty
years. Hongwu was concerned that overseas trade would be
politically and socially destabilizing and he allowed international
trade to take place only if it were organized by the government and

only if it involved tribute giving, and not commercial activity.
Hongwu even executed hundreds of people accused of trying to turn
tribute missions into commercial ventures. Between 1377 and 1397,
no oceangoing tribute missions were allowed. He banned private
individuals from trading with foreigners and would not allow Chinese
to sail overseas.

In 1402 Emperor Yongle came to the throne and initiated one of
the most famous periods of Chinese history by restarting government-
sponsored foreign trade on a big scale. Yongle sponsored Admiral
Zheng He to undertake six huge missions to Southeast and South Asia,
Arabia, and Africa. The Chinese knew about these places from a long
history of trading relations, but nothing had ever happened on this
scale before. The first fleet included 27,800 men and 62 large treasure
ships, accompanied by 190 smaller ships, including ones specifically
for carrying freshwater, others for supplies, and others for troops. Yet
Emperor Yongle put a temporary stop on the missions after the sixth
one in 1422. This was made permanent by his successor, Hongxi, who
ruled from 1424 to 1425. Hongxi’s premature death brought to the
throne Emperor Xuande, who at first allowed Zheng He a final
mission, in 1433. But after this, all overseas trade was banned. By
1436 the construction of seagoing ships was even made illegal. The
ban on overseas trade was not lifted until 1567.

These events, though only the tip of the extractive iceberg that
prevented many economic activities deemed to be potentially
destabilizing, were to have a fundamental impact on Chinese
economic development. Just at the time when international trade and
the discovery of the Americas were fundamentally transforming the
institutions of England, China was cutting itself off from this critical
juncture and turning inward. This inward turn did not end in 1567.
The Ming dynasty was overrun in 1644 by the Jurchen people, the
Manchus of inner Asia, who created the Qing dynasty. A period of
intense political instability then ensued. The Qings engaged in mass
expropriation of property and assets. In the 1690s, T’ang Chen, a
retired Chinese scholar and failed merchant, wrote:

More than fifty years have passed since the founding of
the Ch’ing [Qing] dynasty, and the empire grows poorer
each day. Farmers are destitute, artisans are destitute,
merchants are destitute, and officials too are destitute.

Grain is cheap, yet it is hard to eat one’s fill. Cloth is
cheap, yet it is hard to cover one’s skin. Boatloads of
goods travel from one marketplace to another, but the
cargoes must be sold at a loss. Officials upon leaving their
posts discover they have no wherewithal to support their
households. Indeed the four occupations are all
impoverished.

In 1661 the emperor Kangxi ordered that all people living along the
coast from Vietnam to Chekiang — essentially the entire southern
coast, once the most commercially active part of China — should move
seventeen miles inland. The coast was patrolled by troops to enforce
the measure, and until 1693 there was a ban on shipping everywhere
on the coast. This ban was periodically reimposed in the eighteenth
century, effectively stunting the emergence of Chinese overseas trade.
Though some did develop, few were willing to invest when the
emperor could suddenly change his mind and ban trade, making
investments in ships, equipment, and trading relations worthless or
even worse.

The reasoning of the Ming and Qing states for opposing
international trade is by now familiar: the fear of creative destruction.
The leaders’ primary aim was political stability. International trade
was potentially destabilizing as merchants were enriched and
emboldened, as they were in England during the era of Atlantic
expansion. This was not just what the rulers believed during the Ming
and Qing dynasties, but also the attitude of the rulers of the Song
dynasty, even if they were willing to sponsor technological
innovations and permit greater commercial freedom, provided that
this was under their control. Things got worse under the Ming and
Qing dynasties as the control of the state on economic activity
tightened and overseas trade was banned. There were certainly

markets and trade in Ming and Qing China, and the government taxed
the domestic economy quite lightly. However, it did little to support
innovation, and it exchanged the development of mercantile or
industrial prosperity for political stability. The consequence of all this
absolutist control of the economy was predictable: the Chinese
economy was stagnant throughout the nineteenth and early twentieth
centuries while other economies were industrializing. By the time
Mao set up his communist regime in 1949, China had become one of
the poorest countries in the world.

The Absolutism of Prester John

Absolutism as a set of political institutions and the economic
consequences that flowed from it were not restricted to Europe and
Asia. It was present in Africa, for example, with the Kingdom of
Kongo, as we saw in chapter 2. An even more durable example of
African absolutism is Ethiopia, or Abyssinia, whose roots we came
across in chapter 6, when we discussed the emergence of feudalism
after the decline of Aksum. Abyssinian absolutism was even more
long-lived than its European counterparts, because it was faced with
very different challenges and critical junctures.

After the conversion of the Aksumite king Ezana to Christianity, the
Ethiopians remained Christian, and by the fourteenth century they
had become the focus of the myth of King Prester John. Prester John
was a Christian king who had been cut off from Europe by the rise of
Islam in the Middle East. Initially his kingdom was thought to be
located in India. However, as European knowledge of India increased,
people realized that this was not true. The king of Ethiopia, since he
was a Christian, then became a natural target for the myth. Ethiopian
kings in fact tried hard to forge alliances with European monarchs
against Arab invasions, sending diplomatic missions to Europe from at
least 1300 onward, even persuading the Portuguese king to send
soldiers.

These soldiers, along with diplomats, Jesuits, and travelers wishing
to meet Prester John, left many accounts of Ethiopia. Some of the

most interesting from an economic point of view are by Francisco
Alvares, a chaplain accompanying a Portuguese diplomatic mission,
who was in Ethiopia from 1520 to 1527. In addition, there are
accounts by Jesuit Manoel de Almeida, who lived in Ethiopia from
1624, and by John Bruce, a traveler who was in the country between
1768 and 1773. The writings of these people give a rich account of
political and economic institutions at the time in Ethiopia and leave
no doubt that Ethiopia was a perfect specimen of absolutism. There
were no pluralistic institutions of any kind, nor any checks and
constraints on the power of the emperor, who claimed the right to
rule on the basis of supposed descent from the legendary King
Solomon and the Queen of Sheba.

The consequence of absolutism was great insecurity of property
rights driven by the political strategy of the emperor. Bruce, for
example, noted that

all the land is the king’s; he gives it to whom he pleases
during pleasure, and resumes it when it is his will. As soon
as he dies the whole land in the kingdom is at the disposal
of the Crown; and not only so, but, by death of the present
owner, his possessions however long enjoyed, revert to the
king, and do not fall to the eldest son.

A

Alvares claimed there would be much more “fruit and tillage if the
great men did not ill-treat the people.” Alameida’s account of how the
society worked is very consistent. He observed:

It is so usual for the emperor to exchange, alter and take
away the lands each man holds every two or three years,
sometimes every year and even many times in the course
of a year, that it causes no surprise. Often one man plows
the soil, another sows it and another reaps. Hence it arises
that there is no one who takes care of the land he enjoys;
there is not even anyone to plant a tree because he knows
that he who plants it very rarely gathers the fruit. For the
king, however, it is useful that they should be so

dependent upon him.

These descriptions suggest major similarities between the political
and economic structures of Ethiopia and those of European
absolutism, though they also make it clear that absolutism was more
intense in Ethiopia, and economic institutions even more extractive.
Moreover, as we emphasized in chapter 6, Ethiopia was not subject to
the same critical junctures that helped undermine the absolutist
regime in England. It was cut off from many of the processes that
shaped the modern world. Even if this had not been the case, the
intensity of its absolutism would probably have led the absolutism to
strengthen even more. For example, as in Spain, international trade in
Ethiopia, including the lucrative slave trade, was controlled by the
monarch. Ethiopia was not completely isolated: Europeans did search
for Prester John, and it did have to fight wars against surrounding
Islamic polities. Nevertheless, the historian Edward Gibbon noted
with some accuracy that “encompassed on all sides by the enemies of
their religion, the Aethiopians slept near a thousand years, forgetful
of the world by whom they were forgotten.”

As the European colonization of Africa began in the nineteenth
century, Ethiopia was an independent kingdom under Ras (Duke)
Kassa, who was crowned Emperor Tewodros II in 1855. Tewodros
embarked on a modernization of the state, creating a more
centralized bureaucracy and judiciary, and a military capable of
controlling the country and possibly fighting the Europeans. He
placed military governors, responsible for collecting taxes and
remitting them to him, in charge of all the provinces. His negotiations
with European powers were difficult, and in exasperation he
imprisoned the English consul. In 1868 the English sent an
expeditionary force, which sacked his capital. Tewodros committed
suicide.

All the same, Tewodros’s reconstructed government did manage to
pull off one of the great anticolonial triumphs of the nineteenth
century, against the Italians. In 1889 the throne went to Menelik II,
who was immediately faced with the interest of Italy in establishing a

colony there. In 1885 the German chancellor Bismarck had convened
a conference in Berlin where the European powers hatched the
“Scramble for Africa” — that is, they decided how to divide up Africa
into different spheres of interest. At the conference, Italy secured its
rights to colonies in Eritrea, along the coast of Ethiopia, and Somalia.
Ethiopia, though not represented at the conference, somehow
managed to survive intact. But the Italians still kept designs, and in
1896 they marched an army south from Eritrea. Menelik’s response
was similar to that of a European medieval king; he formed an army
by getting the nobility to call up their armed men. This approach
could not put an army in the field for long, but it could put a huge
one together for a short time. This short time was just enough to
defeat the Italians, whose fifteen thousand men were overwhelmed by
Menelik’s one hundred thousand in the Battle of Adowa in 1896. It
was the most serious military defeat a precolonial African country
was able to inflict on a European power, and secured Ethiopia’s
independence for another forty years.

The last emperor of Ethiopia, Ras Tafari, was crowned Haile
Selassie in 1930. Haile Selassie ruled until he was overthrown by a
second Italian invasion, which began in 1935, but he returned from
exile with the help of the English in 1941. He then ruled until he was
overthrown in a 1974 coup by the Derg, “the Committee,” a group of
Marxist army officers, who then proceeded to further impoverish and
ravage the country. The basic extractive economic institutions of the
absolutist Ethiopian empire, such as gait (this page), and the
feudalism created after the decline of Aksum, lasted until they were
abolished after the 1974 revolution.

Today Ethiopia is one of the poorest countries in the world. The
income of an average Ethiopian is about one-fortieth that of an
average citizen of England. Most people live in rural areas and
practice subsistence agriculture. They lack clean water, electricity,
and access to proper schools or health care. Life expectancy is about
fifty-five years and only one-third of adults are literate. A comparison
between England and Ethiopia spans world inequality. The reason
Ethiopia is where it is today is that, unlike in England, in Ethiopia

absolutism persisted until the recent past. With absolutism came
extractive economic institutions and poverty for the mass of
Ethiopians, though of course the emperors and nobility benefited
hugely. But the most enduring implication of the absolutism was that
Ethiopian society failed to take advantage of industrialization
opportunities during the nineteenth and early twentieth centuries,
underpinning the abject poverty of its citizens today.

The Children of Samaale

Absolutist political institutions around the world impeded
industrialization either indirectly, in the way they organized the
economy, or directly, as we have seen in Austria-Hungary and Russia.
But absolutism was not the only barrier to the emergence of inclusive
economic institutions. At the dawn of the nineteenth century, many
parts of the world, especially in Africa, lacked a state that could
provide even a minimal degree of law and order, which is a
prerequisite for having a modern economy. There was not the
equivalent of Peter the Great in Russia starting the process of political
centralization and then forging Russian absolutism, let alone that of
the Tudors in England centralizing the state without fully destroying
— or, more appropriately, without fully being able to destroy — the
Parliament and other constraints on their power. Without some
degree of political centralization, even if the elites of these African
polities had wished to greet industrialization with open arms, there
wouldn’t have been much they could have done.

Somalia, situated in the Horn of Africa, illustrates the devastating
effects of lack of political centralization. Somalia has been dominated
historically by people organized into six clan families. The four
largest of these, the Dir, Darod, Isaq, and Hawiye, all trace their
ancestry back to a mythical ancestor, Samaale. These clan families
originated in the north of Somalia and gradually spread south and
east, and are even today primarily pastoral people who migrate with
their flocks of goats, sheep, and camels. In the south, the Digil and
the Rahanweyn, sedentary agriculturalists, make up the last two of

the clan families. The territories of these clans are depicted on Map

12 .

Somalis identify first with their clan family, but these are very large
and contain many subgroups. First among these are clans that trace
their descent back to one of the larger clan families. More significant
are the groupings within clans called diya - paying groups, which
consist of closely related kinspeople who pay and collect diya, or
“blood wealth,” compensation against the murder of one of their
members. Somali clans and diya - paying groups were historically
locked in to almost continual conflict over the scarce resources at
their disposal, particularly water sources and good grazing land for
their animals. They also constantly raided the herds of neighboring
clans and diya - paying groups. Though clans had leaders called
sultans, and also elders, these people had no real power. Political
power was very widely dispersed, with every Somali adult man being
able to have his say on decisions that might affect the clan or group.
This was achieved through an informal council made up of all adult
males. There was no written law, no police, and no legal system to
speak of, except that Sharia law was used as a framework within
which informal laws were embedded. These informal laws for a diya-
paying group would be encoded in what was called a heer, a body of
explicitly formulated obligations, rights, and duties the group
demanded others obey in their interactions with the group. With the
advent of colonial rule, these heers began to be written down. For
example, the Hassan Ugaas lineage formed a diya - paying group of
about fifteen hundred men and was a subclan of the Dir clan family in
British Somaliland. On March 8, 1950, their heer was recorded by the
British district commissioner, the first three clauses of which read

1. When a man of the Hassan Ugaas is murdered by an external
group twenty camels of his blood wealth (100) will be taken
by his next of kin and the remaining eighty camels shared
amongst all the Hassan Ugaas.

2. If a man of the Hassan Ugaas is wounded by an outsider and
his injuries are valued at thirty-three-and-a- third camels, ten

camels must be given to him and the remained to his jiffo-
group (a sub-group of the diya group).

3. Homicide amongst members of the Hassan Ugaas is subject
to compensation at the rate of thirty-three-and-a-third
camels, payable only to the deceased’s next of kin. If the
culprit is unable to pay all or part, he will be assisted by his
lineage.

The heavy focus of the heer on killing and wounding reflects the
almost constant state of warfare between diya-paying groups and
clans. Central to this was blood wealth and blood feuding. A crime
against a particular person was a crime against the whole diya-paying
group, and necessitated collective compensation, blood wealth. If
such blood wealth was not paid, the diya - paying group of the person
who had committed the crime faced the collective retribution of the
victim. When modern transportation reached Somalia, blood wealth
was extended to people who were killed or injured in motor
accidents. The Hassan Ugaas’s heer didn’t refer only to murder; clause
6 was “If one man of the Hassan Ugaas insults another at a Hassan
Ugaas council he shall pay 150 shillings to the offended party.”

In early 1955, the flocks of two clans, the Habar Tol Ja’lo and the
Habar Yuunis, were grazing close to each other in the region of
Domberelly. A man from the Yuunis was wounded after a dispute
with a member of the Tol Ja’lo over camel herding. The Yuunis clan
immediately retaliated, attacking the Tol Ja’lo clan and killing a man.
This death led, following the code of blood wealth, to the Yuunis clan
offering compensation to the Tol Ja’lo clan, which was accepted. The
blood wealth was to be handed over in person, as usual in the form of
camels. At the handing-over ceremony, one of the Tol Ja’lo killed a
member of the Yuunis, mistaking him for a member of the diya-
paying group of the murderer. This led to all-out warfare, and within
the next forty-eight hours thirteen Yuunis and twenty-six Tol Ja’lo
had been killed. Warfare continued for another year before elders
from both clans, brought together by the English colonial
administration, managed to broker a deal (the exchange of blood

wealth) that satisfied both sides and was paid over the next three
years.

The paying of blood wealth took place in the shadow of the threat
of force and feuding, and even when it was paid, it did not necessarily
stop conflict. Usually conflict died down and then flared up again.

Political power was thus widely dispersed in Somali society, almost
pluralistically. But without the authority of a centralized state to
enforce order, let alone property rights, this led not to inclusive
institutions. Nobody respected the authority of another, and nobody,
including the British colonial state when it eventually arrived, was
able to impose order. The lack of political centralization made it
impossible for Somalia to benefit from the Industrial Revolution. In
such a climate it would have been unimaginable to invest in or adopt
the new technologies emanating from Britain, or indeed to create the
types of organizations necessary to do so.

The complex politics of Somalia had even more subtle implications
for economic progress. We mentioned earlier some of the great
technological puzzles of African history. Prior to the expansion of
colonial rule in the late nineteenth century, African societies did not
use wheeled transportation or plow agriculture and few had writing.
Ethiopia did, as we have seen. The Somalis also had a written script,
but unlike the Ethiopians, they did not use it. We have already seen
instances of this in African history. African societies may not have
used wheels or plows, but they certainly knew about them. In the
case of the Kingdom of Kongo, as we have seen, this was
fundamentally due to the fact that the economic institutions created
no incentives for people to adopt these technologies. Could the same
issues arise with the adoption of writing?

We can get some sense of this from the Kingdom of Taqali, situated
to the northwest of Somalia, in the Nuba Hills of southern Sudan. The
Kingdom of Taqali was formed in the late eighteenth century by a
band of warriors led by a man called Isma’il, and it stayed
independent until amalgamated into the British Empire in 1884. The
Taqali kings and people had access to writing in Arabic, but it was
not used — except by the kings, for external communication with other

polities and diplomatic correspondence. At first this situation seems
very puzzling. The traditional account of the origin of writing in
Mesopotamia is that it was developed by states in order to record
information, control people, and levy taxes. Wasn’t the Taqali state
interested in this?

These questions were investigated by the historian Janet Ewald in
the late 1970s as she tried to reconstruct the history of the Taqali
state. Part of the story is that the citizens resisted the use of writing
because they feared that it would be used to control resources, such
as valuable land, by allowing the state to claim ownership. They also
feared that it would lead to more systematic taxation. The dynasty
that Isma’il started did not gel into a powerful state. Even if it had
wanted to, the state was not strong enough to impose its will over the
objections of the citizens. But there were other, more subtle factors at
work. Various elites also opposed political centralization, for example,
preferring oral to written interaction with citizens, because this
allowed them maximum discretion. Written laws or orders could not
be taken back or denied and were harder to change; they set
benchmarks that governing elites might want to reverse. So neither
the ruled nor the rulers of Taqali saw the introduction of writing to be
to their advantage. The ruled feared how the rulers would use it, and
the rulers themselves saw the absence of writing as aiding their quite
precarious grip on power. It was the politics of Taqali that kept
writing from being introduced. Though the Somalis had even less of a
well-defined elite compared with the Taqali kingdom, it is quite
plausible that the same forces inhibited their use of writing and their
adoption of other basic technologies.

The Somali case shows the consequences of the lack of political
centralization for economic growth. The historical literature does not
record instances of attempts to create such centralization in Somalia.
However, it is clear why this would have been very difficult. To
politically centralize would have meant that some clans would have
been subject to the control of others. But they rejected any such
dominance, and the surrender of their power that this would have
entailed; the balance of military power in the society would also have

made it difficult to create such centralized institutions. In fact, it is
likely that any group or clan attempting to centralize power would
not only have faced stiff resistance but would have lost its existing
power and privileges. As a consequence of this lack of political
centralization and the implied absence of even the most basic security
of property rights, Somali society never generated incentives to invest
in productivity-enhancing technologies. As the process of
industrialization was under way in other parts of the world in the
nineteenth and early twentieth centuries, Somalis were feuding and
fending for their lives, and their economic backwardness became
more ingrained.

Enduring Backwardness

The Industrial Revolution created a transformative critical juncture
for the whole world during the nineteenth century and beyond: those
societies that allowed and incentivized their citizens to invest in new
technologies could grow rapidly. But many around the world failed to
do so — or explicitly chose not to do so. Nations under the grip of
extractive political and economic institutions did not generate such
incentives. Spain and Ethiopia provide examples where the absolutist
control of political institutions and the implied extractive economic
institutions choked economic incentives long before the dawn of the
nineteenth century. The outcome was similar in other absolutist
regimes — for example, in Austria-Hungary, Russia, the Ottoman
Empire, and China, though in these cases the rulers, because of fear of
creative destruction, not only neglected to encourage economic
progress but also took explicit steps to block the spread of industry
and the introduction of new technologies that would bring
industrialization.

Absolutism is not the only form of extractive political institutions
and was not the only factor preventing industrialization. Inclusive
political and economic institutions necessitate some degree of
political centralization so that the state can enforce law and order,
uphold property rights, and encourage economic activity when

necessary by investing in public services. Yet even today, many
nations, such as Afghanistan, Haiti, Nepal, and Somalia, have states
that are unable to maintain the most rudimentary order, and
economic incentives are all but destroyed. The case of Somalia
illustrates how the process of industrialization also passed by such
societies. Political centralization is resisted for the same reason that
absolutist regimes resist change: the often well-placed fear that
change will reallocate political power from those that dominate today
to new individuals and groups. Thus, as absolutism blocks moves
toward pluralism and economic change, so do the traditional elites
and clans dominating the scene in societies without state
centralization. As a consequence, societies that still lacked such
centralization in the eighteenth and nineteenth centuries were
particularly disadvantaged in the age of industry.

While the variety of extractive institutions ranging from absolutism
to states with little centralization failed to take advantage of the
spread of industry, the critical juncture of the Industrial Revolution
had very different effects in other parts of the world. As we will see in
chapter 10, societies that had already taken steps toward inclusive
political and economic institutions, such as the United States and
Australia, and those where absolutism was more seriously challenged,
such as France and Japan, took advantage of these new economic
opportunities and started a process of rapid economic growth. As
such, the usual pattern of interaction between a critical juncture and
existing institutional differences leading to further institutional and
economic divergence played out again in the nineteenth century, and
this time with an even bigger bang and more fundamental effects on
the prosperity and poverty of nations.

North of the fence: Nogales, Arizona Jim West/imagebroker.net/Photolibrary

South of the fence: Nogales, Sonora Jim West/age fotostock/Photolibrary

T. A. EDISON.

Eleotrio-Lamp.

No. 223,898. Patented Jan. 27. 1880.

Consequences of a level playing field: Thomas Edison’s 1880 patent for the lightbulb
Records of the Patent and Trademark Office; Record Group 241; National Archives

Economic losers from creative destruction: machine-breaking Luddites in early-
nineteenth-century Britain Mary Evans Picture Library /Tom Morgan

Consequences of a complete lack of political centralization in Somalia
REUTERS/Mohamed Guled/Landov

Successive beneficiaries of extractive institutions in Congo:

King of Kongo © CORBIS King Leopold II The Granger Collection, NY

Joseph-Desire Mobutu © Richard Melloul/Sygma/CORBIS

Laurent Kabila © Reuters/CORBIS

The Glorious Revolution: William III of Orange is read the Bill of Rights before
being offered the crown of England by parliament After Edgar Melville Ward/The Bridgeman

Art Library/Getty Images

The bubonic plague of the fourteenth century creates a critical juncture ( The
Triumph of Death painting of the Black Death by Brueghel the Elder) The Granger

Collection, NY

Beneficiary of institutional innovation: the King of Kuba Eliot Elisofon/Time & Life

Pictures/Getty

The emergence of hierarchy and inequality before farming: the grave goods of the
Natufian elite http://en.wikipedia.org/wiki/File:Natufian-Burial -ElWad.jpg

W m

Innovation, essence of inclusive economic growth: James Watt’s steam engine The

Granger Collection, NY

ARKWRIGHTS FIRST COTTON FACTORY AT CROMFORD.

Organizational change, a consequence of inclusive institutions: the factory of
Richard Arkwright at Cromford The Granger Collection, ny

Bird’s-eye view of the dual economy in South Africa: poverty in Transkei, prosperity

in Natal Roger de la Harpe/ Africa Imagery

Consequences of the Industrial Revolution: the storming of the Bastille Bridgeman-

Giraudon/Art Resource, NY

Challenges to inclusive institutions: the Standard Oil Company Library of Congress Prints

and Photographs Division Washington, D.C.

lr<

Noncreative destruction: abandoned Hasting railway station on the way to Bo in
Sierra Leone © Matt Stephenson: www.itsayshere.org

Extractive institutions today: children working in an Uzbek cotton field Environmental

Justice Foundation, www.ejfoundation.org

Breaking a mold: three Tswana chiefs on their way to London Photograph by Willoughby,
courtesy of Botswana National Archives & Records Services

Breaking another mold: Rosa Parks challenges extractive institutions in the U.S.

SOUth The Granger Collection, NY

Extractive institutions devour their children: the Chinese Cultural Revolution vs.
“degenerate intellectuals” Weng Rulan, 1967, IISH Collection, International Institute of Social

History (Amsterdam)

9.

REVERSING DEVELOPMENT

Spice and Genocide

The Moluccan Archipelago in modern Indonesia is made up of three

groups of islands. In the early seventeenth century, the northern
Moluccas housed the independent kingdoms of Tidore, Ternate, and
Bacan. The middle Moluccas were home to the island kingdom of
Ambon. In the south were the Banda Islands, a small archipelago that
was not yet politically unified. Though they seem remote to us today,
the Moluccas were then central to world trade as the only producers
of the valuable spices cloves, mace, and nutmeg. Of these, nutmeg
and mace grew only in the Banda Islands. Inhabitants of these islands
produced and exported these rare spices in exchange for food and
manufactured goods coming from the island of Java, from the
entrepot of Melaka on the Malaysian Peninsula, and from India,
China, and Arabia.

The first contact the inhabitants had with Europeans was in the
sixteenth century, with Portuguese mariners who came to buy spices.
Before then spices had to be shipped through the Middle East, via
trade routes controlled by the Ottoman Empire. Europeans searched
for a passage around Africa or across the Atlantic to gain direct access
to the Spice Islands and the spice trade. The Cape of Good Hope was
rounded by the Portuguese mariner Bartolomeu Dias in 1488, and
India was reached via the same route by Vasco da Gama in 1498. For
the first time the Europeans now had their own independent route to
the Spice Islands.

The Portuguese immediately set about the task of trying to control
the trade in spices. They captured Melaka in 1511. Strategically

situated on the western side of the Malaysian Peninsula, merchants
from all over Southeast Asia came there to sell their spices to other
merchants, Indian, Chinese, and Arabs, who then shipped them to the
West. As the Portuguese traveler Tome Pires put it in 1515: “The
trade and commerce between the different nations for a thousand
leagues on every hand must come to Melaka ... Whoever is lord of
Melaka has his hands at the throat of Venice.”

With Melaka in their hands, the Portuguese systematically tried to
gain a monopoly of the valuable spice trade. They failed.

The opponents they faced were not negligible. Between the
fourteenth and sixteenth centuries, there was a great deal of economic
development in Southeast Asia based on trade in spices. City-states
such as Aceh, Banten, Melaka, Makassar, Pegu, and Brunei expanded
rapidly, producing and exporting spices along with other products
such as hardwoods.

India

China

Japan

Taiwan

' .. Myanmar

IVru

•

Laos

Thailand

Cambodia

Vietnam

Philippines

Luzon

•Manila

Visayji

k . Cntt

•

.Aceh

•

MagumdtuiAo

• Miiutano

Suhj

•

, , , , Malay Peninsula

•

Singapore

Brunei

Tcnuic

•TUtorc

Sir nut r#i

blurt*

Borneo Sulawesi ....

R-.i)rnu»in M ' lklkl1

* Ambon

Banda

• *

Buritrfl

SuTjtMy*

Balt

•

Tubcn

East Timor

Lombok

Map 14: Southeast Asia, the Spice Islands, Ambon, and Banda in 1600

These states had absolutist forms of government similar to those in
Europe in the same period. The development of political institutions
was spurred by similar processes, including technological change in
methods of warfare and international trade. State institutions became
more centralized, with a king at the center claiming absolute power.
Like absolutist rulers in Europe, Southeast Asian kings relied heavily
on revenues from trade, both engaging in it themselves and granting
monopolies to local and foreign elites. As in absolutist Europe, this
generated some economic growth but was a far-from-ideal set of
economic institutions for economic prosperity, with significant entry
barriers and insecure property rights for most. But the process of
commercialization was under way even as the Portuguese were trying
to establish their dominance in the Indian Ocean.

The presence of Europeans swelled and had a much greater impact
with the arrival of the Dutch. The Dutch quickly realized that
monopolizing the supply of the valuable spices of the Moluccas would
be much more profitable than competing against local or other
European traders. In 1600 they persuaded the ruler of Ambon to sign
an exclusive agreement that gave them the monopoly on the clove
trade in Ambon. With the founding of the Dutch East India Company
in 1602, the Dutch attempts to capture the entire spice trade and
eliminate their competitors, by hook or by crook, took a turn for the
better for the Dutch and for the worse for Southeast Asia. The Dutch
East India Company was the second European joint stock company,
following the English East India Company, major landmarks in the
development of the modern corporation, which would subsequently
play a major role in European industrial growth. It was also the
second company that had its own army and the power to wage war
and colonize foreign lands. With the military power of the company
now brought to bear, the Dutch proceeded to eliminate all potential
interlopers to enforce their treaty with the ruler of Ambon. They
captured a key fort held by the Portuguese in 1605 and forcibly
removed all other traders. They then expanded to the northern
Moluccas, forcing the rulers of Tidore, Ternate, and Bacan to agree
that no cloves could be grown or traded in their territories. The treaty

they imposed on Ternate even allowed the Dutch to come and destroy
any clove trees they found there.

Ambon was ruled in a manner similar to much of Europe and the
Americas during that time. The citizens of Ambon owed tribute to the
ruler and were subject to forced labor. The Dutch took over and
intensified these systems to extract more labor and more cloves from
the island. Prior to the arrival of the Dutch, extended families paid
tribute in cloves to the Ambonese elite. The Dutch now stipulated that
each household was tied to the soil and should cultivate a certain
number of clove trees. Households were also obligated to deliver
forced labor to the Dutch.

The Dutch also took control of the Banda Islands, intending this
time to monopolize mace and nutmeg. But the Banda Islands were
organized very differently from Ambon. They were made up of many
small autonomous city-states, and there was no hierarchical social or
political structure. These small states, in reality no more than small
towns, were run by village meetings of citizens. There was no central
authority whom the Dutch could coerce into signing a monopoly
treaty and no system of tribute that they could take over to capture
the entire supply of nutmeg and mace. At first this meant that the
Dutch had to compete with English, Portuguese, Indian, and Chinese
merchants, losing the spices to their competitors when they did not
pay high prices. Their initial plans of setting up a monopoly of mace
and nutmeg dashed, the Dutch governor of Batavia, Jan Pieterszoon
Coen, came up with an alternative plan. Coen founded Batavia, on the
island of Java, as the Dutch East India Company’s new capital in
1618. In 1621 he sailed to Banda with a fleet and proceeded to
massacre almost the entire population of the islands, probably about
fifteen thousand people. All their leaders were executed along with
the rest, and only a few were left alive, enough to preserve the know-
how necessary for mace and nutmeg production. After this genocide
was complete, Coen then proceeded to create the political and
economic structure necessary for his plan: a plantation society. The
islands were divided into sixty-eight parcels, which were given to
sixty-eight Dutchmen, mostly former and current employees of the

Dutch East India Company. These new plantation owners were taught
how to produce the spices by the few surviving Bandanese and could
buy slaves from the East India Company to populate the now-empty
islands and to produce spices, which would have to be sold at fixed
prices back to the company.

The extractive institutions created by the Dutch in the Spice Islands
had the desired effects, though, in Banda this was at the cost of
fifteen thousand innocent lives and the establishment of a set of
economic and political institutions that would condemn the islands to
underdevelopment. By the end of the seventeenth century, the Dutch
had reduced the world supply of these spices by about 60 percent and
the price of nutmeg had doubled.

The Dutch spread the strategy they perfected in the Moluccas to the
entire region, with profound implications for the economic and
political institutions of the rest of Southeast Asia. The long
commercial expansion of several states in the area that had started in
the fourteenth century went into reverse. Even the polities which
were not directly colonized and crushed by the Dutch East India
Company turned inward and abandoned trade. The nascent economic
and political change in Southeast Asia was halted in its tracks.

To avoid the threat of the Dutch East India Company, several states
abandoned producing crops for export and ceased commercial
activity. Autarky was safer than facing the Dutch. In 1620 the state of
Banten, on the island of Java, cut down its pepper trees in the hope
that this would induce the Dutch to leave it in peace. When a Dutch
merchant visited Maguindanao, in the southern Philippines, in 1686,
he was told, “Nutmeg and cloves can be grown here, just as in
Malaku. They are not there now because the old Raja had all of them
ruined before his death. He was afraid the Dutch Company would
come to fight with them about it.” What a trader heard about the
ruler of Maguindanao in 1699 was similar: “He had forbidden the
continued planting of pepper so that he could not thereby get
involved in war whether with the [Dutch] company or with other
potentates.” There was de-urbanization and even population decline.
In 1635 the Burmese moved their capital from Pegu, on the coast, to

Ava, far inland up the Irrawaddy River.

We do not know what the path of economic and political
development of Southeast Asian states would have been without
Dutch aggression. They may have developed their own brand of
absolutism, they may have remained in the same state they were in at
the end of the sixteenth century, or they may have continued their
commercialization by gradually adopting more and more inclusive
institutions. But as in the Moluccas, Dutch colonialism fundamentally
changed their economic and political development. The people in
Southeast Asia stopped trading, turned inward, and became more
absolutist. In the next two centuries, they would be in no position to
take advantage of the innovations that would spring up in the
Industrial Revolution. And ultimately their retreat from trade would
not save them from Europeans; by the end of the eighteenth century,
nearly all were part of European colonial empires.

We saw in chapter 7 how European expansion into the Atlantic fueled
the rise of inclusive institutions in Britain. But as illustrated by the
experience of the Moluccas under the Dutch, this expansion sowed
the seeds of underdevelopment in many diverse corners of the world
by imposing, or further strengthening existing, extractive institutions.
These either directly or indirectly destroyed nascent commercial and
industrial activity throughout the globe or they perpetuated
institutions that stopped industrialization. As a result, as
industrialization was spreading in some parts of the world, places that
were part of European colonial empires stood no chance of benefiting
from these new technologies.

The All-Too-Usual Institution

In Southeast Asia the spread of European naval and commercial
power in the early modern period curtailed a promising period of
economic expansion and institutional change. In the same period as
the Dutch East India Company was expanding, a very different sort of

trade was intensifying in Africa: the slave trade.

In the United States, southern slavery was often referred to as the
“peculiar institution.” But historically, as the great classical scholar
Moses Finlay pointed out, slavery was anything but peculiar, it was
present in almost every society. It was, as we saw earlier, endemic in
Ancient Rome and in Africa, long a source of slaves for Europe,
though not the only one.

In the Roman period slaves came from Slavic peoples around the
Black Sea, from the Middle East, and also from Northern Europe. But
by 1400, Europeans had stopped enslaving each other. Africa,
however, as we saw in chapter 6, did not undergo the transition from
slavery to serfdom as did medieval Europe. Before the early modern
period, there was a vibrant slave trade in East Africa, and large
numbers of slaves were transported across the Sahara to the Arabian
Peninsula. Moreover, the large medieval West African states of Mali,
Ghana, and Songhai made heavy use of slaves in the government, the
army, and agriculture, adopting organizational models from the
Muslim North African states with whom they traded.

It was the development of the sugar plantation colonies of the
Caribbean beginning in the early seventeenth century that led to a
dramatic escalation of the international slave trade and to an
unprecedented increase in the importance of slavery within Africa
itself. In the sixteenth century, probably about 300,000 slaves were
traded in the Atlantic. They came mostly from Central Africa, with
heavy involvement of Kongo and the Portuguese based farther south
in Luanda, now the capital of Angola. During this time, the trans-
Saharan slave trade was still larger, with probably about 550,000
Africans moving north as slaves. In the seventeenth century, the
situation reversed. About 1,350,000 Africans were sold as slaves in
the Atlantic trade, the majority now being shipped to the Americas.
The numbers involved in the Saharan trade were relatively
unchanged. The eighteenth century saw another dramatic increase,
with about 6,000,000 slaves being shipped across the Atlantic and
maybe 700,000 across the Sahara. Adding the figures up over periods
and parts of Africa, well over 10,000,000 Africans were shipped out

of the continent as slaves.

Map 15 (this page) gives some sense of the scale of the slave trade.
Using modern country boundaries, it depicts estimates of the
cumulative extent of slavery between 1400 and 1900 as a percent of
population in 1400. Darker colors show more intense slavery. For
example, in Angola, Benin, Ghana, and Togo, total cumulative slave
exports amounted to more than the entire population of the country
in 1400.

The sudden appearance of Europeans all around the coast of
Western and Central Africa eager to buy slaves could not but have a
transformative impact on African societies. Most slaves who were
shipped to the Americas were war captives subsequently transported
to the coast. The increase in warfare was fueled by huge imports of
guns and ammunition, which the Europeans exchanged for slaves. By
1730 about 180,000 guns were being imported every year just along
the West African coast, and between 1750 and the early nineteenth
century, the British alone sold between 283,000 and 394,000 guns a
year. Between 1750 and 1807, the British sold an extraordinary
22,000 tons of gunpowder, making an average of about 384,000
kilograms annually, along with 91,000 kilograms of lead per year.
Farther to the south, the trade was just as vigorous. On the Loango
coast, north of the Kingdom of Kongo, Europeans sold about 50,000
guns a year.

Morocco

Tunisia

Algeria

IJbva

Egypt

Western Salura

Niger 1

N. — w 11

; -'l

Nigeria

Chad

Eritxea

Sudan

/ African

Gdmeroon Republic

Dfibwui

.... . . Somalia

Ethiopia

r

-■

\

Equatorial Guinea
/Gabon

Democratic

Uganda

Kenya

_ A ... „ . .. Rwanda

t ongo-l?MZ 7 .n>illo Republic

of the Congo

Slave exports as percentage
of population in 1400

0 %

Bl%-50%

■I 50%-100%

H 100% -300%
Missing data

Rwaqda

li

/<

lanzania k

Zambia

Mai

,,

I

Namibia

Botswan.

V, .

M(8ambt.|ue
Zimbabwe r

3

MVlagasr l ar

Ind

South Africa 1 ^***

Map 15: Slave exports from Africa

All this warfare and conflict not only caused major loss of life and
human suffering but also put in motion a particular path of
institutional development in Africa. Before the early modern era,
African societies were less centralized politically than those of
Eurasia. Most polities were small scale, with tribal chiefs and perhaps
kings controlling land and resources. Many, as we showed with
Somalia, had no structure of hierarchical political authority at all. The
slave trade initiated two adverse political processes. First, many
polities initially became more absolutist, organized around a single
objective: to enslave and sell others to European slavers. Second, as a
consequence but, paradoxically, in opposition to the first process,

warring and slaving ultimately destroyed whatever order and
legitimate state authority existed in sub-Saharan Africa. Apart from
warfare, slaves were also kidnapped and captured by small-scale
raiding. The law also became a tool of enslavement. No matter what
crime you committed, the penalty was slavery. The English merchant
Francis Moore observed the consequences of this along the
Senegambia coast of West Africa in the 1730s:

Since this slave trade has been us’d, all punishments are
changed into slavery; there being an advantage on such
condemnations, they strain for crimes very hard, in order
to get the benefit of selling the criminal. Not only murder,
theft and adultery, are punished by selling the criminal for
slave, but every trifling case is punished in the same
manner.

Institutions, even religious ones, became perverted by the desire to
capture and sell slaves. One example is the famous oracle at
Arochukwa, in eastern Nigeria. The oracle was widely believed to
speak for a prominent deity in the region respected by the major local
ethnic groups, the Ijaw, the Ibibio, and the Igbo. The oracle was
approached to settle disputes and adjudicate on disagreements.
Plaintiffs who traveled to Arochukwa to face the oracle had to
descend from the town into a gorge of the Cross River, where the
oracle was housed in a tall cave, the front of which was lined with
human skulls. The priests of the oracle, in league with the Aro slavers
and merchants, would dispense the decision of the oracle. Often this
involved people being “swallowed” by the oracle, which actually
meant that once they had passed through the cave, they were led
away down the Cross River and to the waiting ships of the Europeans.
This process in which all laws and customs were distorted and broken
to capture slaves and more slaves had devastating effects on political
centralization, though in some places it did lead to the rise of
powerful states whose main raison d’etre was raiding and slaving. The
Kingdom of Kongo itself was probably the first African state to

experience a metamorphosis into a slaving state, until it was
destroyed by civil war. Other slaving states arose most prominently in
West Africa and included Oyo in Nigeria, Dahomey in Benin, and
subsequently Asante in Ghana.

The expansion of the state of Oyo in the middle of the seventeenth
century, for example, is directly related to the increase of slave
exports on the coast. The state’s power was the result of a military
revolution that involved the import of horses from the north and the
formation of a powerful cavalry that could decimate opposing armies.
As Oyo expanded south toward the coast, it crushed the intervening
polities and sold many of their inhabitants for slaves. In the period
between 1690 and 1740, Oyo established its monopoly in the interior
of what came to be known as the Slave Coast. It is estimated that 80
to 90 percent of the slaves sold on the coast were the result of these
conquests. A similar dramatic connection between warfare and slave
supply came farther west in the eighteenth century, on the Gold
Coast, the area that is now Ghana. After 1700 the state of Asante
expanded from the interior, in much the same way as Oyo had
previously. During the first half of the eighteenth century, this
expansion triggered the so-called Akan Wars, as Asante defeated one
independent state after another. The last, Gyaman, was conquered in
1747. The preponderance of the 375,000 slaves exported from the
Gold Coast between 1700 and 1750 were captives taken in these
wars.

Probably the most obvious impact of this massive extraction of
human beings was demographic. It is difficult to know with any
certitude what the population of Africa was before the modern
period, but scholars have made various plausible estimates of the
impact of the slave trade on the population. The historian Patrick
Manning estimates that the population of those areas of West and
West-Central Africa that provided slaves for export was around
twenty-two to twenty-five million in the early eighteenth century. On
the conservative assumption that during the eighteenth and early
nineteenth centuries these areas would have experienced a rate of
population growth of about half a percent a year without the slave

trade, Manning estimated that the population of this region in 1850
ought to have been at least forty-six to fifty-three million. In fact, it
was about one-half of this.

This massive difference was not only due to about eight million
people being exported as slaves from this region between 1700 and
1850, but the millions likely killed by continual internal warfare
aimed at capturing slaves. Slavery and the slave trade in Africa
further disrupted family and marriage structures and may also have
reduced fertility.

Beginning in the late eighteenth century, a strong movement to
abolish the slave trade began to gain momentum in Britain, led by the
charismatic figure of William Wilberforce. After repeated failures, in
1807 the abolitionists persuaded the British Parliament to pass a bill
making the slave trade illegal. The United States followed with a
similar measure the next year. The British government went further,
though: it actively sought to implement this measure by stationing
naval squadrons in the Atlantic to try to stamp out the slave trade.
Though it took some time for these measures to be truly effective, and
it was not until 1834 that slavery itself was abolished in the British
Empire, the days of the Atlantic slave trade, by far the largest part of
the trade, were numbered.

Though the end of the slave trade after 1807 did reduce the
external demand for slaves from Africa, this did not mean that
slavery’s impact on African societies and institutions would magically
melt away. Many African states had become organized around
slaving, and the British putting an end to the trade did not change
this reality. Moreover, slavery had become much more prevalent
within Africa itself. These factors would ultimately shape the path of
development in Africa not only before but also after 1807.

In the place of slavery came “legitimate commerce,” a phrase
coined for the export from Africa of new commodities not tied to the
slave trade. These goods included palm oil and kernels, peanuts,
ivory, rubber, and gum arabic. As European and North American
incomes expanded with the spread of the Industrial Revolution,
demand for many of these tropical products rose sharply. Just as

African societies took aggressive advantage of the economic
opportunities presented by the slave trade, they did the same with
legitimate commerce. But they did so in a peculiar context, one in
which slavery was a way of life but the external demand for slaves
had suddenly dried up. What were all these slaves to do now that
they could not be sold to Europeans? The answer was simple: they
could be profitably put to work, under coercion, in Africa, producing
the new items of legitimate commerce.

One of the best documented examples was in Asante, in modern
Ghana. Prior to 1807, the Asante Empire had been heavily involved in
the capturing and export of slaves, bringing them down to the coast
to be sold at the great slaving castles of Cape Coast and Elmina. After
1807, with this option closed off, the Asante political elite
reorganized their economy. However, slaving and slavery did not end.
Rather, slaves were settled on large plantations, initially around the
capital city of Kumase, but later spread throughout the empire
(corresponding to most of the interior of Ghana). They were
employed in the production of gold and kola nuts for export, but also
grew large quantities of food and were intensively used as porters,
since Asante did not use wheeled transportation. Farther east, similar
adaptations took place. In Dahomey, for example, the king had large
palm oil plantations near the coastal ports of Whydah and Porto
Novo, all based on slave labor.

So the abolition of the slave trade, rather than making slavery in
Africa wither away, simply led to a redeployment of the slaves, who
were now used within Africa rather than in the Americas. Moreover,
many of the political institutions the slave trade had wrought in the
previous two centuries were unaltered and patterns of behavior
persisted. For example, in Nigeria in the 1820s and ’30s the once-
great Oyo Kingdom collapsed. It was undermined by civil wars and
the rise of the Yoruba city-states, such as Illorin and Ibadan, that were
directly involved in the slave trade, to its south. In the 1830s, the
capital of Oyo was sacked, and after that the Yoruba cities contested
power with Dahomey for regional dominance. They fought an almost
continuous series of wars in the first half of the century, which

generated a massive supply of slaves. Along with this went the
normal rounds of kidnapping and condemnation by oracles and
smaller-scale raiding. Kidnapping was such a problem in some parts
of Nigeria that parents would not let their children play outside for
fear they would be taken and sold into slavery.

As a result slavery, rather than contracting, appears to have
expanded in Africa throughout the nineteenth century. Though
accurate figures are hard to come by, a number of existing accounts
written by travelers and merchants during this time suggest that in
the West African kingdoms of Asante and Dahomey and in the Yoruba
city-states well over half of the population were slaves. More accurate
data exist from early French colonial records for the western Sudan, a
large swath of western Africa, stretching from Senegal, via Mali and
Burkina Faso, to Niger and Chad. In this region 30 percent of the
population was enslaved in 1900.

Just as with the emergence of legitimate commerce, the advent of
formal colonization after the Scramble for Africa failed to destroy
slavery in Africa. Though much of European penetration into Africa
was justified on the grounds that slavery had to be combated and
abolished, the reality was different. In most parts of colonial Africa,
slavery continued well into the twentieth century. In Sierra Leone, for
example, it was only in 1928 that slavery was finally abolished, even
though the capital city of Freetown was originally established in the
late eighteenth century as a haven for slaves repatriated from the
Americas. It then became an important base for the British antislavery
squadron and a new home for freed slaves rescued from slave ships
captured by the British navy. Even with this symbolism slavery
lingered in Sierra Leone for 130 years. Liberia, just south of Sierra
Leone, was likewise founded for freed American slaves in the 1840s.
Yet there, too, slavery lingered into the twentieth century; as late as
the 1960s, it was estimated that one-quarter of the labor force were
coerced, living and working in conditions close to slavery. Given the
extractive economic and political institutions based on the slave
trade, industrialization did not spread to sub-Saharan Africa, which
stagnated or even experienced economic retardation as other parts of

the world were transforming their economies.

Making a Dual Economy

The “dual economy” paradigm, originally proposed in 1955 by Sir
Arthur Lewis, still shapes the way that most social scientists think
about the economic problems of less-developed countries. According
to Lewis, many less-developed or underdeveloped economies have a
dual structure and are divided into a modern sector and a traditional
sector. The modern sector, which corresponds to the more developed
part of the economy, is associated with urban life, modern industry,
and the use of advanced technologies. The traditional sector is
associated with rural life, agriculture, and “backward” institutions
and technologies. Backward agricultural institutions include the
communal ownership of land, which implies the absence of private
property rights on land. Labor was used so inefficiently in the
traditional sector, according to Lewis, that it could be reallocated to
the modern sector without reducing the amount the rural sector could
produce. For generations of development economists building on
Lewis’s insights, the “problem of development” has come to mean
moving people and resources out of the traditional sector, agriculture
and the countryside, and into the modern sector, industry and cities.
In 1979 Lewis received the Nobel Prize for his work on economic
development.

Lewis and development economists building on his work were
certainly right in identifying dual economies. South Africa was one of
the clearest examples, split into a traditional sector that was
backward and poor and a modern one that was vibrant and
prosperous. Even today the dual economy Lewis identified is
everywhere in South Africa. One of the most dramatic ways to see
this is by driving across the border between the state of KwaZulu-
Natal, formerly Natal, and the state of the Transkei. The border
follows the Great Kei River. To the east of the river in Natal, along
the coast, are wealthy beachfront properties on wide expanses of
glorious sandy beaches. The interior is covered with lush green

sugarcane plantations. The roads are beautiful; the whole area reeks
of prosperity. Across the river, it is as if it were a different time and a
different country. The area is largely devastated. The land is not
green, but brown and heavily deforested. Instead of affluent modern
houses with running water, toilets, and all the modern conveniences,
people live in makeshift huts and cook on open fires. Life is certainly
traditional, far from the modern existence to the east of the river. By
now you will not be surprised that these differences are linked with
major differences in economic institutions between the two sides of
the river.

To the east, in Natal, we have private property rights, functioning
legal systems, markets, commercial agriculture, and industry. To the
west, the Transkei had communal property in land and all-powerful
traditional chiefs until recently. Looked at through the lens of Lewis’s
theory of dual economy, the contrast between the Transkei and Natal
illustrates the problems of African development. In fact, we can go
further, and note that, historically, all of Africa was like the Transkei,
poor with premodern economic institutions, backward technology,
and rule by chiefs. According to this perspective, then, economic
development should simply be about ensuring that the Transkei
eventually turns into Natal.

This perspective has much truth to it but misses the entire logic of
how the dual economy came into existence and its relationship to the
modern economy. The backwardness of the Transkei is not just a
historic remnant of the natural backwardness of Africa. The dual
economy between the Transkei and Natal is in fact quite recent, and
is anything but natural. It was created by the South African white
elites in order to produce a reservoir of cheap labor for their
businesses and reduce competition from black Africans. The dual
economy is another example of underdevelopment created, not of
underdevelopment as it naturally emerged and persisted over
centuries.

South Africa and Botswana, as we will see later, did avoid most of
the adverse effects of the slave trade and the wars it wrought. South
Africans’ first major interaction with Europeans came when the Dutch

East India Company founded a base in Table Bay, now the harbor of
Cape Town, in 1652. At this time the western part of South Africa
was sparsely settled, mostly by hunter-gatherers called the Khoikhoi
people. Farther east, in what is now the Ciskei and Transkei, there
were densely populated African societies specializing in agriculture.
They did not initially interact heavily with the new colony of the
Dutch, nor did they become involved in slaving. The South African
coast was far removed from slave markets, and the inhabitants of the
Ciskei and Transkei, known as the Xhosa, were just far enough inland
not to attract anyone’s attention. As a consequence, these societies did
not feel the brunt of many of the adverse currents that hit West and
Central Africa.

The isolation of these places changed in the nineteenth century. For
the Europeans there was something very attractive about the climate
and the disease environment of South Africa. Unlike West Africa, for
example, South Africa had a temperate climate that was free of the
tropical diseases such as malaria and yellow fever that had turned
much of Africa into the “white man’s graveyard” and prevented
Europeans from settling or even setting up permanent outposts. South
Africa was a much better prospect for European settlement. European
expansion into the interior began soon after the British took over
Cape Town from the Dutch during the Napoleonic Wars. This
precipitated a long series of Xhosa wars as the settlement frontier
expanded further inland. The penetration into the South African
interior was intensified in 1835, when the remaining Europeans of
Dutch descent, who would become known as Afrikaners or Boers,
started their famous mass migration known as the Great Trek away
from the British control of the coast and the Cape Town area. The
Afrikaners subsequently founded two independent states in the
interior of Africa, the Orange Free State and the Transvaal.

The next stage in the development of South Africa came with the
discovery of vast diamond reserves in Kimberly in 1867 and of rich
gold mines in Johannesburg in 1886. This huge mineral wealth in the
interior immediately convinced the British to extend their control
over all of South Africa. The resistance of the Orange Free State and

the Transvaal led to the famous Boer Wars in 1880-1881 and 1899-
1902. After initial unexpected defeat, the British managed to merge
the Afrikaner states with the Cape Province and Natal, to found the
Union of South Africa in 1910. Beyond the fighting between
Afrikaners and the British, the development of the mining economy
and the expansion of European settlement had other implications for
the development of the area. Most notably, they generated demand
for food and other agricultural products and created new economic
opportunities for native Africans both in agriculture and trade.

The Xhosa, in the Ciskei and Transkei, reacted quickly to these
economic opportunities, as the historian Colin Bundy documented. As
early as 1832, even before the mining boom, a Moravian missionary
in the Transkei observed the new economic dynamism in these areas
and noted the demand from the Africans for the new consumer goods
that the spread of Europeans had begun to reveal to them. He wrote,
“To obtain these objects, they look ... to get money by the labour of
their hands, and purchase clothes, spades, ploughs, wagons and other
useful articles.”

The civil commissioner John Hemming’s description of his visit to
Fingoland in the Ciskei in 1876 is equally revealing. He wrote that he
was

struck with the very great advancement made by the
Fingoes in a few years ... Wherever I went I found
substantial huts and brick or stone tenements. In many
cases, substantial brick houses had been erected ... and
fruit trees had been planted; wherever a stream of water
could be made available it had been led out and the soil
cultivated as far as it could be irrigated; the slopes of the
hills and even the summits of the mountains were
cultivated wherever a plough could be introduced. The
extent of the land turned over surprised me; I have not
seen such a large area of cultivated land for years.

As in other parts of sub-Saharan Africa, the use of the plow was

new in agriculture, but when given the opportunity, African farmers
seemed to have been quite ready to adopt the technology. They were
also prepared to invest in wagons and irrigation works.

As the agricultural economy developed, the rigid tribal institutions
started to give way. There is a great deal of evidence that changes in
property rights to land took place. In 1879 the magistrate in
Umzimkulu of Griqualand East, in the Transkei, noted “the growing
desire of the part of natives to become proprietors of land — they have
purchased 38,000 acres.” Three years later he recorded that around
eight thousand African farmers in the district had bought and started
to work on ninety thousand acres of land.

Africa was certainly not on the verge of an Industrial Revolution,
but real change was under way. Private property in land had
weakened the chiefs and enabled new men to buy land and make
their wealth, something that was unthinkable just decades earlier.
This also illustrates how quickly the weakening of extractive
institutions and absolutist control systems can lead to newfound
economic dynamism. One of the success stories was Stephen Sonjica
in the Ciskei, a self-made farmer from a poor background. In an
address in 1911, Sonjica noted how when he first expressed to his
father his desire to buy land, his father had responded: “Buy land?
How can you want to buy land? Don’t you know that all land is God’s,
and he gave it to the chiefs only?” Sonjica’s father’s reaction was
understandable. But Sonjica was not deterred. He got a job in King
William’s Town and noted:

I cunningly opened a private bank account into which I
diverted a portion of my savings . . . This went only until I
had saved eighty pounds ... [I bought] a span of oxen with
yokes, gear, plough and the rest of agricultural
paraphernalia ... I now purchased a small farm ... I cannot
too strongly recommend [farming] as a profession to my
fellow man ... They should however adopt modern
methods of profit making.

An extraordinary piece of evidence supporting the economic
dynamism and prosperity of African farmers in this period is revealed
in a letter sent in 1869 by a Methodist missionary, W. J. Davis.
Writing to England, he recorded with pleasure that he had collected
forty-six pounds in cash “for the Lancashire Cotton Relief Fund.” In
this period the prosperous African farmers were donating money for
relief of the poor English textile workers!

This new economic dynamism, not surprisingly, did not please the
traditional chiefs, who, in a pattern that is by now familiar to us, saw
this as eroding their wealth and power. In 1879 Matthew Blyth, the
chief magistrate of the Transkei, observed that there was opposition
to surveying the land so that it could be divided into private property.
He recorded that “some of the chiefs ... objected, but most of the
people were pleased ... the chiefs see that the granting of individual
titles will destroy their influence among the headmen.”

Chiefs also resisted improvements made on the lands, such as the
digging of irrigation ditches or the building of fences. They
recognized that these improvements were just a prelude to individual
property rights to the land, the beginning of the end for them.
European observers even noted that chiefs and other traditional
authorities, such as witch doctors, attempted to prohibit all
“European ways,” which included new crops, tools such as plows, and
items of trade. But the integration of the Ciskei and the Transkei into
the British colonial state weakened the power of the traditional chiefs
and authorities, and their resistance would not be enough to stop the
new economic dynamism in South Africa. In Fingoland in 1884, a
European observer noted that the people had

transferred their allegiance to us. Their chiefs have been
changed to a sort of titled landowner ... without political
power. No longer afraid of the jealousy of the chief or of
the deadly weapon . . . the witchdoctor, which strikes down
the wealthy cattle owner, the able counsellor, the
introduction of novel customs, the skilful agriculturalist,
reducing them all to the uniform level of mediocrity — no

longer apprehensive of this, the Fingo clansman ... is a
progressive man. Still remaining a peasant farmer ... he
owns wagons and ploughs; he opens water furroughs for
irrigation; he is the owner of a flock of sheep.

Even a modicum of inclusive institutions and the erosion of the
powers of the chiefs and their restrictions were sufficient to start a
vigorous African economic boom. Alas, it would be short lived.
Between 1890 and 1913 it would come to an abrupt end and go into
reverse. During this period two forces worked to destroy the rural
prosperity and dynamism that Africans had created in the previous
fifty years. The first was antagonism by European farmers who were
competing with Africans. Successful African farmers drove down the
price of crops that Europeans also produced. The response of
Europeans was to drive the Africans out of business. The second force
was even more sinister. The Europeans wanted a cheap labor force to
employ in the burgeoning mining economy, and they could ensure
this cheap supply only by impoverishing the Africans. This they went
about methodically over the next several decades.

The 1897 testimony of George Albu, the chairman of the
Association of Mines, given to a Commission of Inquiry pithily
describes the logic of impoverishing Africans so as to obtain cheap
labor. He explained how he proposed to cheapen labor by “simply
telling the boys that their wages are reduced.” His testimony goes as
follows:

Commission: Suppose the kaffirs [black Africans] retire
back to their kraal [cattle pen]? Would you be in favor of
asking the Government to enforce labour?

Albu: Certainly ... I would make it compulsory ... Why
should a nigger be allowed to do nothing? I think a kaffir
should be compelled to work in order to earn his living.
Commission: If a man can live without work, how can
you force him to work?

Albu: Tax him, then ...

Commission: Then you would not allow the kaffir to hold
land in the country, but he must work for the white man
to enrich him?

Albu: He must do his part of the work of helping his
neighbours.

Both of the goals of removing competition with white farmers and
developing a large low-wage labor force were simultaneously
accomplished by the Natives Land Act of 1913. The act, anticipating
Lewis’s notion of dual economy, divided South Africa into two parts,
a modern prosperous part and a traditional poor part. Except that the
prosperity and poverty were actually being created by the act itself. It
stated that 87 percent of the land was to be given to the Europeans,
who represented about 20 percent of the population. The remaining
13 percent was to go to the Africans. The Land Act had many
predecessors, of course, because gradually Europeans had been
confining Africans onto smaller and smaller reserves. But it was the
act of 1913 that definitively institutionalized the situation and set the
stage for the formation of the South African Apartheid regime, with
the white minority having both the political and economic rights and
the black majority being excluded from both. The act specified that
several land reserves, including the Transkei and the Ciskei, were to
become the African “Homelands.” Later these would become known
as the Bantustans, another part of the rhetoric of the Apartheid
regime in South Africa, since it claimed that the African peoples of
Southern Africa were not natives of the area but were descended from
the Bantu people who had migrated out of Eastern Nigeria about a
thousand years before. They thus had no more — and of course, in
practice, less — entitlement to the land than the European settlers.

Map 16 (this page) shows the derisory amount of land allocated to
Africans by the 1913 Land Act and its successor in 1936. It also
records information from 1970 on the extent of a similar land
allocation that took place during the construction of another dual
economy in Zimbabwe, which we discuss in chapter 13.

The 1913 legislation also included provisions intended to stop black

sharecroppers and squatters from farming on white-owned land in
any capacity other than as labor tenants. As the secretary for native
affairs explained, “The effect of the act was to put a stop, for the
future, to all transactions involving anything in the nature of
partnership between Europeans and natives in respect of land or the
fruits of land. All new contracts with natives must be contracts of
service. Provided there is a bona fide contract of this nature there is
nothing to prevent an employer from paying a native in kind, or by
the privilege of cultivating a defined piece of ground ... But the
native cannot pay the master anything for his right to occupy the
land.”

Zambia

Hnniri'*

Zimbabwe

Namibia

Botswana

Atlantic Ocean

Mjplfa P-burg. Sw02 . lfl

-V

* Kimbctfcv* Vv

South Africa ‘ G " < « u * nd L e>

Cape Town*

Cist*

Ti

•IS

Fingoland

Malawi

Mozambique

Land acts. 1913 and 1936
Land apportionment. 1970
Modem boundaries

Map 16: The amounts of land allocated to Africans by the minority white
regimes in South Africa and Zimbabwe

To the development economists who visited South Africa in the
1950s and ’60s, when the academic discipline was taking shape and
the ideas of Arthur Lewis were spreading, the contrast between these

Homelands and the prosperous modern white European economy
seemed to be exactly what the dual economy theory was about. The
European part of the economy was urban and educated, and used
modern technology. The Homelands were poor, rural, and backward;
labor there was very unproductive; people, uneducated. It seemed to
be the essence of timeless, backward Africa.

Except that the dual economy was not natural or inevitable. It had
been created by European colonialism. Yes, the Homelands were poor
and technologically backward, and the people were uneducated. But
all this was an outcome of government policy, which had forcibly
stamped out African economic growth and created the reservoir of
cheap, uneducated African labor to be employed in European-
controlled mines and lands. After 1913 vast numbers of Africans were
evicted from their lands, which were taken over by whites, and
crowded into the Homelands, which were too small for them to earn
an independent living from. As intended, therefore, they would be
forced to look for a living in the white economy, supplying their labor
cheaply. As their economic incentives collapsed, the advances that
had taken place in the preceding fifty years were all reversed. People
gave up their plows and reverted to farming with hoes — that is, if
they farmed at all. More often they were just available as cheap labor,
which the Homelands had been structured to ensure.

It was not only the economic incentives that were destroyed. The
political changes that had started to take place also went into reverse.
The power of chiefs and traditional rulers, which had previously been
in decline, was strengthened, because part of the project of creating a
cheap labor force was to remove private property in land. So the
chiefs’ control over land was reaffirmed. These measures reached
their apogee in 1951, when the government passed the Bantu
Authorities Act. As early as 1940, G. Findlay put his finger right on
the issue:

Tribal tenure is a guarantee that the land will never
properly be worked and will never really belong to the
natives. Cheap labour must have a cheap breeding place,

and so it is furnished to the Africans at their own expense.

The dispossession of the African farmers led to their mass
impoverishment. It created not only the institutional foundations of a
backward economy, but the poor people to stock it.

The available evidence demonstrates the reversal in living
standards in the Homelands after the Natives Land Act of 1913. The
Transkei and the Ciskei went into a prolonged economic decline. The
employment records from the gold mining companies collected by the
historian Francis Wilson show that this decline was widespread in the
South African economy as a whole. Following the Natives Land Act
and other legislation, miners’ wages fell by 30 percent between 1911
and 1921. In 1961, despite relatively steady growth in the South
African economy, these wages were still 12 percent lower than they
had been in 1911. No wonder that over this period South Africa
became the most unequal country in the world.

But even in these circumstances, couldn’t black Africans have made
their way in the European, modern economy, started a business, or
have become educated and begun a career? The government made
sure these things could not happen. No African was allowed to own
property or start a business in the European part of the economy — the
87 percent of the land. The Apartheid regime also realized that
educated Africans competed with whites rather than supplying cheap
labor to the mines and to white-owned agriculture. As early as 1904 a
system of job reservation for Europeans was introduced in the mining
economy. No African was allowed to be an amalgamator, an assayer,
a banksman, a blacksmith, a boiler maker, a brass finisher, a
brassmolder, a bricklayer . . . and the list went on and on, all the way
to woodworking machinist. At a stroke, Africans were banned from
occupying any skilled job in the mining sector. This was the first
incarnation of the famous “colour bar,” one of the several racist
inventions of South Africa’s regime. The colour bar was extended to
the entire economy in 1926, and lasted until the 1980s. It is not
surprising that black Africans were uneducated; the South African
state not only removed the possibility of Africans benefiting

economically from an education but also refused to invest in black
schools and discouraged black education. This policy reached its peak
in the 1950s, when, under the leadership of Hendrik Verwoerd, one of
the architects of the Apartheid regime that would last until 1994, the
government passed the Bantu Education Act. The philosophy behind
this act was bluntly spelled out by Verwoerd himself in a speech in
1954:

The Bantu must be guided to serve his own community in
all respects. There is no place for him in the European
community above the level of certain forms of
labour ... For that reason it is to no avail to him to receive
a training which has as its aim absorption in the European
community while he cannot and will not be absorbed
there.

Naturally, the type of dual economy articulated in Verwoerd’s
speech is rather different from Lewis’s dual economy theory. In South
Africa the dual economy was not an inevitable outcome of the process
of development. It was created by the state. In South Africa there was
to be no seamless movement of poor people from the backward to the
modern sector as the economy developed. On the contrary, the
success of the modern sector relied on the existence of the backward
sector, which enabled white employers to make huge profits by
paying very low wages to black unskilled workers. In South Africa
there would not be a process of the unskilled workers from the
traditional sector gradually becoming educated and skilled, as Lewis’s
approach envisaged. In fact, the black workers were purposefully kept
unskilled and were barred from high-skill occupations so that skilled
white workers would not face competition and could enjoy high
wages. In South Africa black Africans were indeed “trapped” in the
traditional economy, in the Homelands. But this was not the problem
of development that growth would make good. The Homelands were
what enabled the development of the white economy.

It should also be no surprise that the type of economic development

that white South Africa was achieving was ultimately limited, being
based on extractive institutions the whites had built to exploit the
blacks. South African whites had property rights, they invested in
education, and they were able to extract gold and diamonds and sell
them profitably in the world market. But over 80 percent of the South
African population was marginalized and excluded from the great
majority of desirable economic activities. Blacks could not use their
talents; they could not become skilled workers, businessmen,
entrepreneurs, engineers, or scientists. Economic institutions were
extractive; whites became rich by extracting from blacks. Indeed,
white South Africans shared the living standards of people of Western
European countries, while black South Africans were scarcely richer
than those in the rest of sub-Saharan Africa. This economic growth
without creative destruction, from which only the whites benefited,
continued as long as revenues from gold and diamonds increased. By
the 1970s, however, the economy had stopped growing.

And it will again be no surprise that this set of extractive economic
institutions was built on foundations laid by a set of highly extractive
political institutions. Before its overthrow in 1994, the South African
political system vested all power in whites, who were the only ones
allowed to vote and run for office. Whites dominated the police force,
the military, and all political institutions. These institutions were
structured under the military domination of white settlers. At the
time of the foundation of the Union of South Africa in 1910, the
Afrikaner polities of the Orange Free State and the Transvaal had
explicit racial franchises, barring blacks completely from political
participation. Natal and the Cape Colony allowed blacks to vote if
they had sufficient property, which typically they did not. The status
quo of Natal and the Cape Colony was kept in 1910, but by the
1930s, blacks had been explicitly disenfranchised everywhere in
South Africa.

The dual economy of South Africa did come to an end in 1994. But
not because of the reasons that Sir Arthur Lewis theorized about. It
was not the natural course of economic development that ended the
color bar and the Homelands. Black South Africans protested and rose

up against the regime that did not recognize their basic rights and did
not share the gains of economic growth with them. After the Soweto
uprising of 1976, the protests became more organized and stronger,
ultimately bringing down the Apartheid state. It was the
empowerment of blacks who managed to organize and rise up that
ultimately ended South Africa’s dual economy in the same way that
South African whites’ political force had created it in the first place.

Development Reversed

World inequality today exists because during the nineteenth and
twentieth centuries some nations were able to take advantage of the
Industrial Revolution and the technologies and methods of
organization that it brought while others were unable to do so.
Technological change is only one of the engines of prosperity, but it is
perhaps the most critical one. The countries that did not take
advantage of new technologies did not benefit from the other engines
of prosperity, either. As we have shown in this and the previous
chapter, this failure was due to their extractive institutions, either a
consequence of the persistence of their absolutist regimes or because
they lacked centralized states. But this chapter has also shown that in
several instances the extractive institutions that underpinned the
poverty of these nations were imposed, or at the very least further
strengthened, by the very same process that fueled European growth:
European commercial and colonial expansion. In fact, the profitability
of European colonial empires was often built on the destruction of
independent polities and indigenous economies around the world, or
on the creation of extractive institutions essentially from the ground
up, as in the Caribbean islands, where, following the almost total
collapse of the native populations, Europeans imported African slaves
and set up plantation systems.

We will never know what the trajectories of independent city-states
such as those in the Banda Islands, in Aceh, or in Burma (Myanmar)
would have been without the European intervention. They may have
had their own indigenous Glorious Revolution or slowly moved

toward more inclusive political and economic institutions based on
growing trade in spices and other valuable commodities. But this
possibility was removed by the expansion of the Dutch East India
Company. The company stamped out any hope of indigenous
development in the Banda Islands by carrying out its genocide. Its
threat also made the city-states in many other parts of Southeast Asia
pull back from commerce.

The story of one of the oldest civilizations in Asia, India, is similar,
though the reversing of development was done not by the Dutch but
by the British. India was the largest producer and exporter of textiles
in the world in the eighteenth century. Indian calicoes and muslins
flooded the European markets and were traded throughout Asia and
even eastern Africa. The main agent that carried them to the British
Isles was the English East India Company. Founded in 1600, two
years before its Dutch version, the English East India Company spent
the seventeenth century trying to establish a monopoly on the
valuable exports from India. It had to compete with the Portuguese,
who had bases in Goa, Chittagong, and Bombay, and the French with
bases at Pondicherry, Chandernagore, Yanam, and Karaikal. Worse
still for the East India Company was the Glorious Revolution, as we
saw in chapter 7. The monopoly of the East India Company had been
granted by the Stuart kings and was immediately challenged after
1688, and even abolished for over a decade. The loss of power was
significant, as we saw earlier (this page-this page), because British
textile producers were able to induce Parliament to ban the import of
calicoes, the East India Company’s most profitable item of trade. In
the eighteenth century, under the leadership of Robert Clive, the East
India Company switched strategies and began to develop a
continental empire. At the time, India was split into many competing
polities, though many were still nominally under the control of the
Mughal emperor in Delhi. The East India Company first expanded in
Bengal in the east, vanquishing the local powers at the battles of
Plassey in 1757 and Buxar in 1764. The East India Company looted
local wealth and took over, and perhaps even intensified, the
extractive taxation institutions of the Mughal rulers of India. This

expansion coincided with the massive contraction of the Indian textile
industry, since, after all, there was no longer a market for these goods
in Britain. The contraction went along with de-urbanization and
increased poverty. It initiated a long period of reversed development
in India. Soon, instead of producing textiles, Indians were buying
them from Britain and growing opium for the East India Company to
sell in China.

The Atlantic slave trade repeated the same pattern in Africa, even if
starting from less developed conditions than in Southeast Asia and
India. Many African states were turned into war machines intent on
capturing and selling slaves to Europeans. As conflict between
different polities and states grew into continuous warfare, state
institutions, which in many cases had not yet achieved much political
centralization in any case, crumbled in large parts of Africa, paving
the way for persistent extractive institutions and the failed states of
today that we will study later. In a few parts of Africa that escaped
the slave trade, such as South Africa, Europeans imposed a different
set of institutions, this time designed to create a reservoir of cheap
labor for their mines and farms. The South African state created a
dual economy, preventing 80 percent of the population from taking
part in skilled occupations, commercial farming, and
entrepreneurship. All this not only explains why industrialization
passed by large parts of the world but also encapsulates how
economic development may sometimes feed on, and even create, the
underdevelopment in some other part of the domestic or the world
economy.

10 .

THE DIFFUSION OF PROSPERITY

Honor Among Thieves

Eighteenth-century England — or more appropriately, Great Britain after

the 1707 union of England, Wales, and Scotland — had a simple
solution for dealing with criminals: out of sight, out of mind, or at
least out of trouble. They transported many to penal colonies in the
empire. Before the War of Independence, the convicted criminals,
convicts, were primarily sent to the American colonies. After 1783 the
independent United States of America was no longer so welcoming to
British convicts, and the authorities in Britain had to find another
home for them. They first thought about West Africa. But the climate,
with endemic diseases such as malaria and yellow fever, against
which Europeans had no immunity, was so deadly that the authorities
decided it was unacceptable to send even convicts to the “white man’s
graveyard.” Their next option was Australia. Its eastern seaboard had
been explored by the great seafarer Captain James Cook. On April 29,
1770, Cook landed in a wonderful inlet, which he called Botany Bay
in honor of the rich species found there by the naturalists traveling
with him. This seemed like an ideal location to British government
officials. The climate was temperate, and the place was as far out of
sight and mind as could be imagined.

A fleet of eleven ships packed with convicts was on its way to
Botany Bay in January 1788 under the command of Captain Arthur
Phillip. On January 26, now celebrated as Australia Day, they set up
camp in Sydney Cove, the heart of the modern city of Sydney. They
called the colony New South Wales. On board one of the ships, the
Alexander, captained by Duncan Sinclair, were a married couple of

convicts, Henry and Susannah Cable. Susannah had been found guilty
of stealing and was initially sentenced to death. This sentence was
later commuted to fourteen years and transportation to the American
colonies. That plan fell through with the independence of the United
States. In the meantime, in Norwich Castle Jail, Susannah met and fell
in love with Henry, a fellow convict. In 1787 she was picked to be
transported to the new convict colony in Australia with the first fleet
heading there. But Henry was not. By this time Susannah and Henry
had a young son, also called Henry. This decision meant the family
was to be separated. Susannah was moved to a prison boat moored on
the Thames, but the word got out about this wrenching event and
reached the ears of a philanthropist, Lady Cadogan. Lady Cadogan
organized a successful campaign to reunite the Cables. Now they were
both to be transported with young Henry to Australia. Lady Cadogan
also raised £20 to purchase goods for them, which they would receive
in Australia. They sailed on the Alexander, but when they arrived in
Botany Bay, the parcel of goods had vanished, or at least that is what
Captain Sinclair claimed.

What could the Cables do? Not much, according to English or
British law. Even though in 1787, Britain had inclusive political and
economic institutions, this inclusiveness did not extend to convicts,
who had practically no rights. They could not own property. They
could certainly not sue anyone in court. In fact, they could not even
give evidence in court. Sinclair knew this and probably stole the
parcel. Though he would never admit it, he did boast that he could
not be sued by the Cables. He was right according to British law. And
in Britain the whole affair would have ended there. But not in
Australia. A writ was issued to David Collins, the judge advocate
there, as follows:

Whereas Henry Cable and his wife, new settlers of this
place, had before they left England a certain parcel
shipped on board the Alexander transport Duncan Sinclair
Master, consisting of cloaths and several other articles
suitable for their present situation, which were collected

and bought at the expence of many charitable disposed
persons for the use of the said Henry Cable, his wife and
child. Several applications has been made for the express
purpose of obtaining the said parcel from the Master of the
Alexander now lying at this port, and that without effect
(save and except) a small part of the said parcel containing
a few books, the residue and remainder, which is of a
more considerable value still remains on board the said
ship Alexander, the Master of which, seems to be very
neglectfull in not causing the same to be delivered, to its
respective owners as aforesaid.

Henry and Susannah, since they were both illiterate, could not sign
the writ and just put their “crosses” at the bottom. The words “new
settlers of this place” were later crossed out, but were highly
significant. Someone anticipated that if Henry Cable and his wife
were described as convicts, the case would have no hope of
proceeding. Someone had come up instead with the idea of calling
them new settlers. This was probably a bit too much for Judge Collins
to take, and most likely he was the one who had these words struck
out. But the writ worked. Collins did not throw out the case, and
convened the court, with a jury entirely made up of soldiers. Sinclair
was called before the court. Though Collins was less than enthusiastic
about the case, and the jury was composed of the people sent to
Australia to guard convicts such as the Cables, the Cables won.
Sinclair contested the whole affair on the grounds that the Cables
were criminals. But the verdict stood, and he had to pay fifteen
pounds.

To reach this verdict Judge Collins didn’t apply British law; he
ignored it. This was the first civil case adjudicated in Australia. The
first criminal case would have appeared equally bizarre to those in
Britain. A convict was found guilty of stealing another convict’s
bread, which was worth two pence. At the time, such a case would
not have come to court, since convicts were not allowed to own
anything. Australia was not Britain, and its law would not be just

British. And Australia would soon diverge from Britain in criminal
and civil law as well as in a host of economic and political
institutions.

The penal colony of New South Wales initially consisted of the
convicts and their guards, mostly soldiers. There were few “free
settlers” in Australia until the 1820s, and the transportation of
convicts, though it stopped in New South Wales in 1840, continued
until 1868 in Western Australia. Convicts had to perform “compulsory
work,” essentially just another name for forced labor, and the guards
intended to make money out of it. Initially the convicts had no pay.
They were given only food in return for the labor they performed.
The guards kept what they produced. But this system, like the ones
with which the Virginia Company experimented in Jamestown, did
not work very well, because convicts did not have the incentives to
work hard or do good work. They were lashed or banished to Norfolk
Island, just thirteen square miles of territory situated more than one
thousand miles east of Australia in the Pacific Ocean. But since
neither banishing nor lashing worked, the alternative was to give
them incentives. This was not a natural idea to the soldiers and
guards. Convicts were convicts, and they were not supposed to sell
their labor or own property. But in Australia there was nobody else to
do the work. There were of course Aboriginals, possibly as many as
one million at the time of the founding of New South Wales. But they
were spread out over a vast continent, and their density in New South
Wales was insufficient for the creation of an economy based on their
exploitation. There was no Latin American option in Australia. The
guards thus embarked on a path that would ultimately lead to
institutions that were even more inclusive than those back in Britain.
Convicts were given a set of tasks to do, and if they had extra time,
they could work for themselves and sell what they produced.

The guards also benefited from the convicts’ new economic
freedoms. Production increased, and the guards set up monopolies to
sell goods to the convicts. The most lucrative of these was for rum.
New South Wales at this time, just like other British colonies, was run
by a governor, appointed by the British government. In 1806 Britain

appointed William Bligh, the man who seventeen years previously, in
1789, had been captain of the H.M.S. Bounty, during the famous
“Mutiny on the Bounty” Bligh was a strict disciplinarian, a trait that
was probably largely responsible for the mutiny. His ways had not
changed, and he immediately challenged the rum monopolists. This
would lead to another mutiny, this time by the monopolists, led by a
former soldier, John Macarthur. The events, which came to be known
as the Rum Rebellion, again led to Bligh’s being overpowered by
rebels, this time on land rather than aboard the Bounty. Macarthur
had Bligh locked up. The British authorities subsequently sent more
soldiers to deal with the rebellion. Macarthur was arrested and
shipped back to Britain. But he was soon released, and he returned to
Australia to play a major role in both the politics and economics of
the colony.

The roots of the Rum Rebellion were economic. The strategy of
giving the convicts incentives was making a lot of money for men
such as Macarthur, who arrived in Australia as a soldier in the second
group of ships that landed in 1790. In 1796 he resigned from the
army to concentrate on business. By that time he already had his first
sheep, and realized that there was a lot of money to be made in sheep
farming and wool export. Inland from Sydney were the Blue
Mountains, which were finally crossed in 1813, revealing vast
expanses of open grassland on the other side. It was sheep heaven.
Macarthur was soon the richest man in Australia, and he and his
fellow sheep magnates became known as the Squatters, since the land
on which they grazed their sheep was not theirs. It was owned by the
British government. But at first this was a small detail. The Squatters
were the elite of Australia, or, more appropriately, the Squattocracy.

Even with a squattocracy, New South Wales did not look anything
like the absolutist regimes of Eastern Europe or of the South
American colonies. There were no serfs as in Austria-Hungary and
Russia, and no large indigenous populations to exploit as in Mexico
and Peru. Instead, New South Wales was like Jamestown, Virginia, in
many ways: the elite ultimately found it in their interest to create
economic institutions that were significantly more inclusive than

those in Austria-Hungary, Russia, Mexico, and Peru. Convicts were
the only labor force, and the only way to incentivize them was to pay
them wages for the work they were doing.

Convicts were soon allowed to become entrepreneurs and hire
other convicts. More notably, they were even given land after
completing their sentences, and they had all their rights restored.
Some of them started to get rich, even the illiterate Henry Cable. By
1798 he owned a hotel called the Ramping Horse, and he also had a
shop. He bought a ship and went into the trade of sealskins. By 1809
he owned at least nine farms of about 470 acres and also a number of
shops and houses in Sydney.

The next conflict in New South Wales would be between the elite
and the rest of the society, made up of convicts, ex-convicts, and their
families. The elite, led by former guards and soldiers such as
Macarthur, included some of the free settlers who had been attracted
to the colony because of the boom in the wool economy. Most of the
property was still in the hands of the elite, and the ex-convicts and
their descendants wanted an end to transportation, the opportunity of
trial by a jury of their peers, and access to free land. The elite wanted
none of these. Their main concern was to establish legal title to the
lands they squatted on. The situation was again similar to the events
that had transpired in North America more than two centuries earlier.
As we saw in chapter 1, the victories of the indentured servants
against the Virginia Company were followed by the struggles in
Maryland and the Carolinas. In New South Wales, the roles of Lord
Baltimore and Sir Anthony Ashley-Cooper were played by Macarthur
and the Squatters. The British government was again on the side of
the elite, though they also feared that one day Macarthur and the
Squatters might be tempted to declare independence.

The British government dispatched John Bigge to the colony in
1819 to head a commission of inquiry into the developments there.
Bigge was shocked by the rights that the convicts enjoyed and
surprised by the fundamentally inclusive nature of the economic
institutions of this penal colony. He recommended a radical overhaul:
convicts could not own land, nobody should be allowed to pay

convicts wages anymore, pardons were to be restricted, ex-convicts
were not to be given land, and punishment was to be made much
more draconian. Bigge saw the Squatters as the natural aristocracy of
Australia and envisioned an autocratic society dominated by them.
This wasn’t to be.

While Bigge was trying to turn back the clock, ex-convicts and their
sons and daughters were demanding greater rights. Most important,
they realized, again just as in the United States, that to consolidate
their economic and political rights fully they needed political
institutions that would include them in the process of decision
making. They demanded elections in which they could participate as
equals and representative institutions and assemblies in which they
could hold office.

The ex-convicts and their sons and daughters were led by the
colorful writer, explorer, and journalist William Wentworth.
Wentworth was one of the leaders of the first expedition that crossed
the Blue Mountains, which opened the vast grasslands to the
Squatters; a town on these mountains is still named after him. His
sympathies were with the convicts, perhaps because of his father,
who was accused of highway robbery and had to accept
transportation to Australia to avoid trial and possible conviction. At
this time, Wentworth was a strong advocate of more inclusive
political institutions, an elected assembly, trial by jury for ex-convicts
and their families, and an end to transportation to New South Wales.
He started a newspaper, the Australian, which would from then on
lead the attack on the existing political institutions. Macarthur didn’t
like Wentworth and certainly not what he was asking for. He went
through a list of Wentworth’s supporters, characterizing them as
follows:

sentenced to be hung since he came here
repeatedly flogged at the cart’s tail a
London Jew

Jew publican lately deprived of his license
auctioneer transported for trading in slaves

often flogged here

son of two convicts

a swindler — deeply in debt

an American adventurer

an attorney with a worthless character

a stranger lately failed here in a musick shop

married to the daughter to two convicts

married to a convict who was formerly a tambourine girl.

Macarthur and the Squatters’ vigorous opposition could not stop
the tide in Australia, however. The demand for representative
institutions was strong and could not be suppressed. Until 1823 the
governor had ruled New South Wales more or less on his own. In that
year his powers were limited by the creation of a council appointed
by the British government. Initially the appointees were from the
Squatters and nonconvict elite, Macarthur among them, but this
couldn’t last. In 1831 the governor Richard Bourke bowed to pressure
and for the first time allowed ex-convicts to sit on juries. Ex-convicts
and in fact many new free settlers also wanted transportation of
convicts from Britain to stop, because it created competition in the
labor market and drove down wages. The Squatters liked low wages,
but they lost. In 1840 transportation to New South Wales was
stopped, and in 1842 a legislative council was created with two-thirds
of its members being elected (the rest appointed). Ex-convicts could
stand for office and vote if they held enough property, and many did.

By the 1850s, Australia had introduced adult white male suffrage.
The demands of the citizens, ex-convicts and their families, were now
far ahead of what William Wentworth had first imagined. In fact, by
this time he was on the side of conservatives insisting on an unelected
Legislative Council. But just like Macarthur before, Wentworth would
not be able to halt the tide toward more inclusive political
institutions. In 1856 the state of Victoria, which had been carved out
of New South Wales in 1851, and the state of Tasmania would
become the first places in the world to introduce an effective secret
ballot in elections, which stopped vote buying and coercion. Today

we still call the standard method of achieving secrecy in voting in
elections the Australian ballot.

The initial circumstances in Sydney, New South Wales, were very
similar to those in Jamestown, Virginia, 181 years earlier, though the
settlers at Jamestown were mostly indentured laborers, rather than
convicts. In both cases the initial circumstances did not allow for the
creation of extractive colonial institutions. Neither colony had dense
populations of indigenous peoples to exploit, ready access to precious
metals such as gold or silver, or soil and crops that would make slave
plantations economically viable. The slave trade was still vibrant in
the 1780s, and New South Wales could have been filled up with
slaves had it been profitable. It wasn’t. Both the Virginia Company
and the soldiers and free settlers who ran New South Wales bowed to
the pressures, gradually creating inclusive economic institutions that
developed in tandem with inclusive political institutions. This
happened with even less of a struggle in New South Wales than it had
in Virginia, and subsequent attempts to put this trend into reverse
failed.

Australia, like the United States, experienced a different path to inclusive
institutions than the one taken by England. The same revolutions that
shook England during the Civil War and then the Glorious Revolution
were not needed in the United States or Australia because of the very
different circumstances in which those countries were founded —
though this of course does not mean that inclusive institutions were
established without any conflict, and, in the process, the United States
had to throw off British colonialism. In England there was a long
history of absolutist rule that was deeply entrenched and required a
revolution to remove it. In the United States and Australia, there was
no such thing. Though Lord Baltimore in Maryland and John
Macarthur in New South Wales might have aspired to such a role,
they could not establish a strong enough grip on society for their
plans to bear fruit. The inclusive institutions established in the United
States and Australia meant that the Industrial Revolution spread

quickly to these lands and they began to get rich. The path these
countries took was followed by colonies such as Canada and New
Zealand.

There were still other paths to inclusive institutions. Large parts of
Western Europe took yet a third path to inclusive institutions under
the impetus of the French Revolution, which overthrew absolutism in
France and then generated a series of interstate conflicts that spread
institutional reform across much of Western Europe. The economic
consequence of these reforms was the emergence of inclusive
economic institutions in most of Western Europe, the Industrial
Revolution, and economic growth.

Breaking the Barriers: The French Revolution

For the three centuries prior to 1789, France was ruled by an
absolutist monarchy. French society was divided into three segments,
the so-called estates. The aristocrats (the nobility) made up the First
Estate, the clergy the Second Estate, and everybody else the Third
Estate. Different estates were subject to different laws, and the first
two estates had rights that the rest of the population did not. The
nobility and the clergy did not pay taxes, while the citizens had to
pay several different taxes, as we would expect from a regime that
was largely extractive. In fact, not only was the Church exempt from
taxes, but it also owned large swaths of land and could impose its
own taxes on peasants. The monarch, the nobility, and the clergy
enjoyed a luxurious lifestyle, while much of the Third Estate lived in
dire poverty. Different laws not only guaranteed a greatly
advantageous economic position to the nobility and the clergy, but it
also gave them political power.

Life in French cities of the eighteenth century was harsh and
unhealthy. Manufacturing was regulated by powerful guilds, which
generated good incomes for their members but prevented others from
entering these occupations or starting new businesses. The so-called
ancien regime prided itself on its continuity and stability. Entry by
entrepreneurs and talented individuals into new occupations would

create instability and was not tolerated. If life in the cities was harsh,
life in the villages was probably worse. As we have seen, by this time
the most extreme form of serfdom, which tied people to the land and
forced them to work for and pay dues to the feudal lords, was long in
decline in France. Nevertheless, there were restrictions on mobility
and a plethora of feudal dues that the French peasants were required
to pay to the monarch, the nobility, and the Church.

Against this background, the French Revolution was a radical
affair. On August 4, 1789, the National Constituent Assembly entirely
changed French laws by proposing a new constitution. The first
article stated:

The National Assembly hereby completely abolishes the
feudal system. It decrees that, among the existing rights
and dues, both feudal and censuel, all those originating in
or representing real or personal serfdom shall be abolished
without indemnification.

Its ninth article then continued:

Pecuniary privileges, personal or real, in the payment of
taxes are abolished forever. Taxes shall be collected from
all the citizens, and from all property, in the same manner
and in the same form. Plans shall be considered by which
the taxes shall be paid proportionally by all, even for the
last six months of the current year.

Thus, in one swoop, the French Revolution abolished the feudal
system and all the obligations and dues that it entailed, and it entirely
removed the tax exemptions of the nobility and the clergy. But
perhaps what was most radical, even unthinkable at the time, was the
eleventh article, which stated:

All citizens, without distinction of birth, are eligible to any
office or dignity, whether ecclesiastical, civil, or military;
and no profession shall imply any derogation.

So there was now equality before the law for all, not only in daily
life and business, but also in politics. The reforms of the revolution
continued after August 4. It subsequently abolished the Church’s
authority to levy special taxes and turned the clergy into employees
of the state. Together with the removal of the rigid political and
social roles, critical barriers against economic activities were stamped
out. The guilds and all occupational restrictions were abolished,
creating a more level playing field in the cities.

These reforms were a first step toward ending the reign of the
absolutist French monarchs. Several decades of instability and war
followed the declarations of August 4. But an irreversible step was
taken away from absolutism and extractive institutions and toward
inclusive political and economic institutions. These changes would be
followed by other reforms in the economy and in politics, ultimately
culminating in the Third Republic in 1870, which would bring to
France the type of parliamentary system that the Glorious Revolution
put in motion in England. The French Revolution created much
violence, suffering, instability, and war. Nevertheless, thanks to it, the
French did not get trapped with extractive institutions blocking
economic growth and prosperity, as did absolutist regimes of Eastern
Europe such as Austria-Hungary and Russia.

How did the absolutist French monarchy come to the brink of the
1789 revolution? After all, we have seen that many absolutist regimes
were able to survive for long periods of time, even in the midst of
economic stagnation and social upheaval. As with most instances of
revolutions and radical changes, it was a confluence of factors that
opened the way to the French Revolution, and these were intimately
related to the fact that Britain was industrializing rapidly. And of
course the path was, as usual, contingent, as many attempts to
stabilize the regime by the monarchy failed and the revolution turned
out to be more successful in changing institutions in France and
elsewhere in Europe than many could have imagined in 1789.

Many laws and privileges in France were remnants of medieval
times. They not only favored the First and Second Estates relative to
the majority of the population but also gave them privileges vis-a-vis

the Crown. Louis XIV, the Sun King, ruled France for fifty-four years,
between 1661 to his death in 1715, though he actually came to the
throne in 1643, at the age of five. He consolidated the power of the
monarchy, furthering the process toward greater absolutism that had
started centuries earlier. Many monarchs often consulted the so-called
Assembly of Notables, consisting of key aristocrats handpicked by the
Crown. Though largely consultative, the Assembly still acted as a mild
constraint on the monarch’s power. For this reason, Louis XIV ruled
without convening the Assembly. Under his reign, France achieved
some economic growth — for example, via participation in Atlantic
and colonial trade. Louis’s able minister of finance, Jean-Baptiste
Colbert, also oversaw the development of government-sponsored and
government-controlled industry, a type of extractive growth. This
limited amount of growth benefited almost exclusively the First and
Second Estates. Louis XIV also wanted to rationalize the French tax
system, because the state often had problems financing its frequent
wars, its large standing army, and the King’s own luxurious retinue,
consumption, and palaces. Its inability to tax even the minor nobility
put severe limits on its revenues.

Though there had been little economic growth, by the time Louis
XVI came to power in 1774, there had nevertheless been large
changes in society. Moreover, the earlier fiscal problems had turned
into a fiscal crisis, and the Seven Years’ War with the British between
1756 and 1763, in which France lost Canada, had been particularly
costly. A number of significant figures attempted to balance the royal
budget by restructuring the debt and increasing taxes; among them
were Anne-Robert-Jacques Turgot, one of the most famous
economists of the time; Jacques Necker, who would also play an
important role after the revolution; and Charles Alexandre de
Calonne. But none succeeded. Calonne, as part of his strategy,
persuaded Louis XVI to summon the Assembly of Notables. The king
and his advisers expected the Assembly to endorse his reforms much
in the same way as Charles I expected the English Parliament to
simply agree to pay for an army to fight the Scottish when he called it
in 1640. The Assembly took an unexpected step and decreed that only

a representative body, the Estates-General, could endorse such
reforms.

The Estates-General was a very different body from the Assembly of
Notables. While the latter consisted of the nobility and was largely
handpicked by the Crown from among major aristocrats, the former
included representatives from all three estates. It had last been
convened in 1614. When the Estates-General gathered in 1789 in
Versailles, it became immediately clear that no agreement could be
reached. There were irreconcilable differences, as the Third Estate
saw this as its chance to increase its political power and wanted to
have more votes in the Estates-General, which the nobility and the
clergy steadfastly opposed. The meeting ended on May 5, 1789,
without any resolution, except the decision to convene a more
powerful body, the National Assembly, deepening the political crisis.
The Third Estate, particularly the merchants, businessmen,
professionals, and artisans, who all had demands for greater power,
saw these developments as evidence of their increasing clout. In the
National Assembly, they therefore demanded even more say in the
proceedings and greater rights in general. Their support in the streets
all over the country by citizens emboldened by these developments
led to the reconstitution of the Assembly as the National Constituent
Assembly on July 9.

Meanwhile, the mood in the country, and especially in Paris, was
becoming more radical. In reaction, the conservative circles around
Louis XVI persuaded him to sack Necker, the reformist finance
minister. This led to further radicalization in the streets. The outcome
was the famous storming of the Bastille on July 14, 1789. From this
point onward, the revolution started in earnest. Necker was
reinstated, and the revolutionary Marquis de Lafayette was put in
charge of the National Guard of Paris.

Even more remarkable than the storming of the Bastille were the
dynamics of the National Constituent Assembly, which on August 4,
1789, with its newfound confidence, passed the new constitution,
abolishing feudalism and the special privileges of the First and Second
Estates. But this radicalization led to fractionalization within the

Assembly, since there were many conflicting views about the shape
that society should take. The first step was the formation of local
clubs, most notably the radical Jacobin Club, which would later take
control of the revolution. At the same time, the nobles were fleeing
the country in great numbers — the so-called emigres. Many were also
encouraging the king to break with the Assembly and take action,
either by himself or with the help of foreign powers, such as Austria,
the native country of Queen Marie Antoinette and where most of the
emigres had fled. As many in the streets started to see an imminent
threat against the achievements of the revolution over the past two
years, radicalization gathered pace. The National Constituent
Assembly passed the final version of the constitution on September
29, 1791, turning France into a constitutional monarchy, with
equality of rights for all men, no feudal obligations or dues, and an
end to all trading restrictions imposed by guilds. France was still a
monarchy, but the king now had little role and, in fact, not even his
freedom.

But the dynamics of the revolution were then irreversibly altered
by the war that broke out in 1792 between France and the “first
coalition,” led by Austria. The war increased the resolve and
radicalism of the revolutionaries and of the masses (the so-called sans-
culottes, which translates as “without knee breeches,” because they
could not afford to wear the style of trousers then fashionable). The
outcome of this process was the period known as the Terror, under
the command of the Jacobin faction led by Robespierre and Saint-
Just, unleashed after the executions of Louis XVI and Marie
Antoinette. It led to the executions of not only scores of aristocrats
and counterrevolutionaries but also several major figures of the
revolution, including the former popular leaders Brissot, Danton, and
Desmoulins.

But the Terror soon spun out of control and ultimately came to an
end in July 1794 with the execution of its own leaders, including
Robespierre and Saint- Just. There followed a phase of relative
stability, first under the somewhat ineffective Directory, between
1795 and 1799, and then with more concentrated power in the form

of a three-person Consulate, consisting of Ducos, Sieyes, and
Napoleon Bonaparte. Already during the Directory, the young general
Napoleon Bonaparte had become famous for his military successes,
and his influence was only to grow after 1799. The Consulate soon
became Napoleon’s personal rule.

The years between 1799 and the end of Napoleon’s reign, 1815,
witnessed a series of great military victories for France, including
those at Austerlitz, Jena-Auerstadt, and Wagram, bringing continental
Europe to its knees. They also allowed Napoleon to impose his will,
his reforms, and his legal code across a wide swath of territory. The
fall of Napoleon after his final defeat in 1815 would also bring a
period of retrenchment, more restricted political rights, and the
restoration of the French monarchy under Louis XVII. But all these
were simply slowing the ultimate emergence of inclusive political
institutions.

The forces unleashed by the revolution of 1789 ended French
absolutism and would inevitably, even if slowly, lead to the
emergence of inclusive institutions. France, and those parts of Europe
where the revolutionary reforms had been exported, would thus take
part in the industrialization process already under way in the
nineteenth century.

Exporting the Revolution

On the eve of the French Revolution in 1789, there were severe
restrictions placed on Jews throughout Europe. In the German city of
Frankfurt, for example, their lives were regulated by orders set out in
a statute dating from the Middle Ages. There could be no more than
five hundred Jewish families in Frankfurt, and they all had to live in a
small, walled part of town, the Judengasse, the Jewish ghetto. They
could not leave the ghetto at night, on Sundays, or during any
Christian festival.

The Judengasse was incredibly cramped. It was a quarter of a mile
long but no more than twelve feet wide and in some places less than
ten feet wide. Jews lived under constant repression and regulation.

Each year, at most two new families could be admitted to the ghetto,
and at most twelve Jewish couples could get married, and only if they
were both above the age of twenty-five. Jews could not farm; they
could also not trade in weapons, spices, wine, or grain. Until 1726
they had to wear specific markers, two concentric yellow rings for
men and a striped veil for women. All Jews had to pay a special poll
tax.

As the French Revolution erupted, a successful young businessman,
Mayer Amschel Rothschild, lived in the Frankfurt Judengasse. By the
early 1780s, Rothschild had established himself as the leading dealer
in coins, metals, and antiques in Frankfurt. But like all Jews in the
city, he could not open a business outside the ghetto or even live
outside it.

This was all to change soon. In 1791 the French National Assembly
emancipated French Jewry. The French armies were now also
occupying the Rhineland and emancipating the Jews of Western
Germany. In Frankfurt their effect would be more abrupt and perhaps
somewhat unintentional. In 1796 the French bombarded Frankfurt,
demolishing half of the Judengasse in the process. Around two
thousand Jews were left homeless and had to move outside the
ghetto. The Rothschilds were among them. Once outside the ghetto,
and now freed from the myriad regulations barring them from
entrepreneurship, they could seize new business opportunities. This
included a contract to supply grain to the Austrian army, something
they would previously not have been allowed to do.

By the end of the decade, Rothschild was one of the richest Jews in
Frankfurt and already a well-established businessman. Full
emancipation had to wait until 1811; it was finally implemented by
Karl von Dalberg, who had been made Grand Duke of Frankfurt in
Napoleon’s 1806 reorganization of Germany. Mayer Amschel told his
son, “[Y]ou are now a citizen.”

Such events did not end the struggle for Jewish emancipation, since
there were subsequent reverses, particularly at the Congress of Vienna
of 1815, which formed the post-Napoleonic political settlement. But
there was no going back to the ghetto for the Rothschilds. Mayer

Amschel and his sons would soon have the largest bank in nineteenth-
century Europe, with branches in Frankfurt, London, Paris, Naples,
and Vienna.

This was not an isolated event. First the French Revolutionary
Armies and then Napoleon invaded large parts of continental Europe,
and in almost all the areas they invaded, the existing institutions were
remnants of medieval times, empowering kings, princes, and nobility
and restricting trade both in cities and the countryside. Serfdom and
feudalism were much more important in many of these areas than in
France itself. In Eastern Europe, including Prussia and the Hungarian
part of Austria-Hungary, serfs were tied to the land. In the West this
strict form of serfdom had already vanished, but peasants owed to
feudal lords various seigneurial fees, taxes, and labor obligations. For
example, in the polity of Nassau-Usingen, peasants were subject to
230 different payments, dues, and services. Dues included one that
had to be paid after an animal had been slaughtered, called the blood
tithe; there was also a bee tithe and a wax tithe. If a piece of property
was bought or sold, the lord was owed fees. The guilds regulating all
kinds of economic activity in the cities were also typically stronger in
these places than in France. In the western German cities of Cologne
and Aachen, the adoption of spinning and weaving textile machines
was blocked by guilds. Many cities, from Berne in Switzerland to
Florence in Italy, were controlled by a few families.

The leaders of the French Revolution and, subsequently, Napoleon
exported the revolution to these lands, destroying absolutism, ending
feudal land relations, abolishing guilds, and imposing equality before
the law — the all-important notion of rule of law, which we will
discuss in greater detail in the next chapter. The French Revolution
thus prepared not only France but much of the rest of Europe for
inclusive institutions and the economic growth that these would spur.

As we have seen, alarmed by the developments in France, several
European powers organized around Austria in 1792 to attack France,
ostensibly to free King Louis XVI, but in reality to crush the French
Revolution. The expectation was that the makeshift armies fielded by
the revolution would soon crumble. But after some early defeats, the

armies of the new French Republic were victorious in an initially
defensive war. There were serious organizational problems to
overcome. But the French were ahead of other countries in a major
innovation: mass conscription. Introduced in August 1793, mass
conscription allowed the French to field large armies and develop a
military advantage verging on supremacy even before Napoleon’s
famous military skills came on the scene.

Norway

Sweden

Denmark

United Kingdom

Ireland

Poland

( wrmany

Austria

Switzerland

■^^osniaU

la 1

Albania

Bulgaria

IVrtngal

Greece

Latvia

Lithuania

Belarus

Slovakia
Hungary

nia ' Romania

I Ruled by Napoleon
Satellite kingdoms
Modem boundaries

Map 17: Napoleon s empire

Initial military success encouraged the Republic’s leadership to
expand France’s borders, with an eye toward creating an effective
buffer between the new republic and the hostile monarchs of Prussia
and Austria. The French quickly seized the Austrian Netherlands and
the United Provinces, essentially today’s Belgium and the
Netherlands. The French also took over much of modern-day
Switzerland. In all three places, the French had strong control
through the 1790s.

Germany was initially hotly contested. But by 1795, the French had
firm control over the Rhineland, the western part of Germany lying
on the left bank of the Rhine River. The Prussians were forced to
recognize this fact under the Treaty of Basel. Between 1795 and 1802,
the French held the Rhineland, but not any other part of Germany. In
1802 the Rhineland was officially incorporated into France.

Italy remained the main seat of war in the second half the 1790s,
with the Austrians as the opponents. Savoy was annexed by France in
1792, and a stalemate was reached until Napoleon’s invasion in April
1796. In his first major continental campaign, by early 1797,
Napoleon had conquered almost all Northern Italy, except for Venice,
which was taken by the Austrians. The Treaty of Campo Formio,
signed with the Austrians in October 1797, ended the War of the First
Coalition and recognized a number of French-controlled republics in
Northern Italy. However, the French continued to expand their
control over Italy even after this treaty, invading the Papal States and
establishing the Roman Republic in March 1798. In January 1799,
Naples was conquered and the Parthenopean Republic created. With
the exception of Venice, which remained Austrian, the French now
controlled the entire Italian peninsula either directly, as in the case of
Savoy, or through satellite states, such as the Cisalpine, Ligurian,
Roman, and Parthenopean republics.

There was further back-and-forth in the War of the Second
Coalition, between 1798 and 1801, but this ended with the French
essentially remaining in control. The French revolutionary armies
quickly started carrying out a radical process of reform in the lands
they’d conquered, abolishing the remaining vestiges of serfdom and
feudal land relations and imposing equality before the law. The clergy
were stripped of their special status and power, and the guilds in
urban areas were stamped out or at the very least much weakened.
This happened in the Austrian Netherlands immediately after the
French invasion in 1795 and in the United Provinces, where the
French founded the Batavian Republic, with political institutions very
similar to those in France. In Switzerland the situation was similar,
and the guilds as well as feudal landlords and the Church were

defeated, feudal privileges removed, and the guilds abolished and
expropriated.

What was started by the French Revolutionary Armies was
continued, in one form or another, by Napoleon. Napoleon was first
and foremost interested in establishing firm control over the
territories he conquered. This sometimes involved cutting deals with
local elites or putting his family and associates in charge, as during
his brief control of Spain and Poland. But Napoleon also had a
genuine desire to continue and deepen the reforms of the revolution.
Most important, he codified the Roman law and the ideas of equality
before the law into a legal system that became known as the Code
Napoleon. Napoleon saw this code as his greatest legacy and wished
to impose it in every territory he controlled.

Of course, the reforms imposed by the French Revolution and
Napoleon were not irreversible. In some places, such as in Hanover,
Germany, the old elites were reinstated shortly after Napoleon’s fall
and much of what the French achieved was lost for good. But in many
other places, feudalism, the guilds, and the nobility were permanently
destroyed or weakened. For instance, even after the French left, in
many cases the Code Napoleon remained in effect.

All in all, French armies wrought much suffering in Europe, but
they also radically changed the lay of the land. In much of Europe,
gone were feudal relations; the power of the guilds; the absolutist
control of monarchs and princes; the grip of the clergy on economic,
social, and political power; and the foundation of ancien regime, which
treated different people unequally based on their birth status. These
changes created the type of inclusive economic institutions that
would then allow industrialization to take root in these places. By the
middle of the nineteenth century, industrialization was rapidly under
way in almost all the places that the French controlled, whereas
places such as Austria-Hungary and Russia, which the French did not
conquer, or Poland and Spain, where French hold was temporary and
limited, were still largely stagnant.

Seeking Modernity

In the autumn of 1867, Okubo Toshimichi, a leading courtier of the
feudal Japanese Satsuma domain, traveled from the capital of Edo,
now Tokyo, to the regional city of Yamaguchi. On October 14 he met
with leaders of the Choshu domain. He had a simple proposal: they
would join forces, march their armies to Edo, and overthrow the
shogun, the ruler of Japan. By this time Okubo Toshimichi already
had the leaders of the Tosa and Aki domains on board. Once the
leaders of the powerful Choshu agreed, a secret Satcho Alliance was
formed.

In 1868 Japan was an economically underdeveloped country that
had been controlled since 1600 by the Tokugawa family, whose ruler
had taken the title shogun (commander) in 1603. The Japanese
emperor was sidelined and assumed a purely ceremonial role. The
Tokugawa shoguns were the dominant members of a class of feudal
lords who ruled and taxed their own domains, among them those of
Satsuma, ruled by the Shimazu family. These lords, along with their
military retainers, the famous samurai, ran a society that was similar
to that of medieval Europe, with strict occupational categories,
restrictions on trade, and high rates of taxation on farmers. The
shogun ruled from Edo, where he monopolized and controlled foreign
trade and banned foreigners from the country. Political and economic
institutions were extractive, and Japan was poor.

But the domination of the shogun was not complete. Even as the
Tokugawa family took over the country in 1600, they could not
control everyone. In the south of the country, the Satsuma domain
remained quite autonomous and was even allowed to trade
independently with the outside world through the Ryukyu Islands. It
was in the Satsuma capital of Kagoshima where Okubo Toshimichi
was born in 1830. As the son of a samurai, he, too, became a samurai.
His talent was spotted early on by Shimazu Nariakira, the lord of
Satsuma, who quickly promoted him in the bureaucracy. At the time,
Shimazu Nariakira had already formulated a plan to use Satsuma
troops to overthrow the shogun. He wanted to expand trade with Asia

and Europe, abolish the old feudal economic institutions, and
construct a modern state in Japan. His nascent plan was cut short by
his death in 1858. His successor, Shimazu Hisamitsu, was more
circumspect, at least initially.

Okubo Toshimichi had by now become more and more convinced
that Japan needed to overthrow the feudal shogunate, and he
eventually convinced Shimazu Hisamitsu. To rally support for their
cause, they wrapped it in outrage over the sidelining of the emperor.
The treaty (Okubo Toshimichi had already signed with the Tosa
domain asserted that “a country does not have two monarchs, a home
does not have two masters; government devolves to one ruler.” But
the real intention was not simply to restore the emperor to power but
to change the political and economic institutions completely. On the
Tosa side, one of the treaty’s signers was Sakamoto Ryuma. As
Satsuma and Choshu mobilized their armies, Sakamoto Ryuma
presented the shogun with an eight-point plan, urging him to resign
to avoid civil war. The plan was radical, and though clause 1 stated
that “political power of the country should be returned to the
Imperial Court, and all decrees issued by the Court,” it included far
more than just the restoration of the emperor. Clauses 2, 3, 4, and 5
stated:

2. Two legislative bodies, an Upper and Lower house, should
be established, and all government measures should be
decided on the basis of general opinion.

3. Men of ability among the lords, nobles and people at large
should be employed as councillors, and traditional offices of
the past which have lost their purpose should be abolished.

4. Foreign affairs should be carried on according to appropriate
regulations worked out on the basis of general opinion.

5. Legislation and regulations of earlier times should be set
aside and a new and adequate code should be selected.

Shogun Yoshinobu agreed to resign, and on January 3, 1868, the
Meiji Restoration was declared; Emperor Komei and, one month later

after Komei died, his son Meiji were restored to power. Though
Satsuma and Choshu forces now occupied Edo and the imperial
capital Kyoto, they feared that the Tokugawas would attempt to
regain power and re-create the shogunate. (Okubo Toshimichi wanted
the Tokugawas crushed forever. He persuaded the emperor to abolish
the Tokugawa domain and confiscate their lands. On January 27 the
former shogun Yoshinobu attacked Satsuma and Choshu forces, and
civil war broke out; it raged until the summer, when finally the
Tokugawas were vanquished.

Following the Meiji Restoration there was a process of
transformative institutional reforms in Japan. In 1869 feudalism was
abolished, and the three hundred fiefs were surrendered to the
government and turned into prefectures, under the control of an
appointed governor. Taxation was centralized, and a modern
bureaucratic state replaced the old feudal one. In 1869 the equality of
all social classes before the law was introduced, and restrictions on
internal migration and trade were abolished. The samurai class was
abolished, though not without having to put down some rebellions.
Individual property rights on land were introduced, and people were
allowed freedom to enter and practice any trade. The state became
heavily involved in the construction of infrastructure. In contrast to
the attitudes of absolutist regimes to railways, in 1869 the Japanese
regime formed a steamship line between Tokyo and Osaka and built
the first railway between Tokyo and Yokohama. It also began to
develop a manufacturing industry, and (Okubo Toshimichi, as
minister of finance, oversaw the beginning of a concerted effort of
industrialization. The lord of Satsuma domain had been a leader in
this, building factories for pottery, cannon, and cotton yarn and
importing English textile machinery to create the first modern cotton
spinning mill in Japan in 1861. He also built two modern shipyards.
By 1890 Japan was the first Asian country to adopt a written
constitution, and it created a constitutional monarchy with an elected
parliament, the Diet, and an independent judiciary. These changes
were decisive factors in enabling Japan to be the primary beneficiary
from the Industrial Revolution in Asia.

In the mid-nineteenth century both China and Japan were poor nations,
languishing under absolutist regimes. The absolutist regime in China
had been suspicious of change for centuries. Though there were many
similarities between China and Japan — the Tokugawa shogunate had
also banned overseas trade in the seventeenth century, as Chinese
emperors had done earlier, and were opposed to economic and
political change — there were also notable political differences. China
was a centralized bureaucratic empire ruled by an absolute emperor.
The emperor certainly faced constraints on his power, the most
important of which was the threat of rebellion. During the period
1850 to 1864, the whole of southern China was ravaged by the
Taiping Rebellion, in which millions died either in conflict or through
mass starvation. But opposition to the emperor was not
institutionalized.

The structure of Japanese political institutions was different. The
shogunate had sidelined the emperor, but as we have seen, the
Tokugawa power was not absolute, and domains such as that of the
Satsumas maintained independence, even the ability to conduct
foreign trade on their own behalf.

As with France, an important consequence of the British Industrial
Revolution for China and Japan was military vulnerability. China was
humbled by British sea power during the First Opium War, between
1839 and 1842, and the same threat became all too real for the
Japanese as U.S. warships, led by Commodore Matthew Perry, pulled
into Edo Bay in 1853. The reality that economic backwardness
created military backwardness was part of the impetus behind
Shimazu Nariakira’s plan to overthrow the shogunate and put in
motion the changes that eventually led to the Meiji Restoration. The
leaders of the Satsuma domain realized that economic growth —
perhaps even Japanese survival — could be achieved only by
institutional reforms, but the shogun opposed this because his power
was tied to the existing set of institutions. To exact reforms, the
shogun had to be overthrown, and he was. The situation was similar
in China, but the different initial political institutions made it much
harder to overthrow the emperor, something that happened only in

1911. Instead of reforming institutions, the Chinese tried to match the
British militarily by importing modern weapons. The Japanese built
their own armaments industry.

As a consequence of these initial differences, each country
responded differently to the challenges of the nineteenth century, and
Japan and China diverged dramatically in the face of the critical
juncture created by the Industrial Revolution. While Japanese
institutions were being transformed and the economy was embarking
on a path of rapid growth, in China forces pushing for institutional
change were not strong enough, and extractive institutions persisted
largely unabated until they would take a turn for the worse with
Mao’s communist revolution in 1949.

Roots of World Inequality

This and the previous three chapters have told the story of how
inclusive economic and political institutions emerged in England to
make the Industrial Revolution possible, and why certain countries
benefited from the Industrial Revolution and embarked on the path to
growth, while others did not or, in fact, steadfastly refused to allow
even the beginning of industrialization. Whether a country did
embark on industrialization was largely a function of its institutions.
The United States, which underwent a transformation similar to the
English Glorious Revolution, had already developed its own brand of
inclusive political and economic institutions by the end of the
eighteenth century. It would thus become the first nation to exploit
the new technologies coming from the British Isles, and would soon
surpass Britain and become the forerunner of industrialization and
technological change. Australia followed a similar path to inclusive
institutions, even if somewhat later and somewhat less noticed. Its
citizens, just like those in England and the United States, had to fight
to obtain inclusive institutions. Once these were in place, Australia
would launch its own process of economic growth. Australia and the
United States could industrialize and grow rapidly because their
relatively inclusive institutions would not block new technologies,

innovation, or creative destruction.

Not so in most of the other European colonies. Their dynamics
would be quite the opposite of those in Australia and the United
States. Lack of a native population or resources to be extracted made
colonialism in Australia and the United States a very different sort of
affair, even if their citizens had to fight hard for their political rights
and for inclusive institutions. In the Moluccas as in the many other
places Europeans colonized in Asia, in the Caribbean, and in South
America, citizens had little chance of winning such a fight. In these
places, European colonists imposed a new brand of extractive
institutions, or took over whatever extractive institutions they found,
in order to be able to extract valuable resources, ranging from spices
and sugar to silver and gold. In many of these places, they put in
motion a set of institutional changes that would make the emergence
of inclusive institutions very unlikely. In some of them they explicitly
stamped out whatever burgeoning industry or inclusive economic
institutions existed. Most of these places would be in no situation to
benefit from industrialization in the nineteenth century or even in the
twentieth.

The dynamics in the rest of Europe were also quite different from
those in Australia and the United States. As the Industrial Revolution
in Britain was gathering speed at the end of the eighteenth century,
most European countries were ruled by absolutist regimes, controlled
by monarchs and by aristocracies whose major source of income was
from their landholdings or from trading privileges they enjoyed
thanks to prohibitive entry barriers. The creative destruction that
would be wrought by the process of industrialization would erode the
leaders’ trading profits and take resources and labor away from their
lands. The aristocracies would be economic losers from
industrialization. More important, they would also be political losers,
as the process of industrialization would undoubtedly create
instability and political challenges to their monopoly of political
power.

But the institutional transitions in Britain and the Industrial
Revolution created new opportunities and challenges for European

states. Though there was absolutism in Western Europe, the region
had also shared much of the institutional drift that had impacted
Britain in the previous millennium. But the situation was very
different in Eastern Europe, the Ottoman Empire, and China. These
differences mattered for the dissemination of industrialization. Just
like the Black Death or the rise of Atlantic trade, the critical juncture
created by industrialization intensified the ever-present conflict over
institutions in many European nations. A major factor was the French
Revolution of 1789. The end of absolutism in France opened the way
for inclusive institutions, and the French ultimately embarked on
industrialization and rapid economic growth. The French Revolution
in fact did more than that. It exported its institutions by invading and
forcibly reforming the extractive institutions of several neighboring
countries. It thus opened the way to industrialization not only in
France, but in Belgium, the Netherlands, Switzerland, and parts of
Germany and Italy. Farther east the reaction was similar to that after
the Black Death, when, instead of crumbling, feudalism intensified.
Austria-Hungary, Russia, and the Ottoman Empire fell even further
behind economically, but their absolutist monarchies managed to stay
in place until the First World War.

Elsewhere in the world, absolutism was as resilient as in Eastern
Europe. This was particularly true in China, where the Ming-Qing
transition led to a state committed to building a stable agrarian
society and hostile to international trade. But there were also
institutional differences that mattered in Asia. If China reacted to the
Industrial Revolution as Eastern Europe did, Japan reacted in the
same way as Western Europe. Just as in France, it took a revolution to
change the system, this time one led by the renegade lords of the
Satsuma, Choshu, Tosa, and Aki domains. These lords overthrew the
shogun, created the Meiji Restoration, and moved Japan onto the
path of institutional reforms and economic growth.

We also saw that absolutism was resilient in isolated Ethiopia.
Elsewhere on the continent the very same force of international trade
that helped to transform English institutions in the seventeenth
century locked large parts of western and central Africa into highly

extractive institutions via the slave trade. This destroyed societies in
some places and led to the creation of extractive slaving states in
others.

The institutional dynamics we have described ultimately
determined which countries took advantage of the major
opportunities present in the nineteenth century onward and which
ones failed to do so. The roots of the world inequality we observe
today can be found in this divergence. With a few exceptions, the rich
countries of today are those that embarked on the process of
industrialization and technological change starting in the nineteenth
century, and the poor ones are those that did not.

11 .

THE VIRTUOUS CIRCLE

The Black Act

W indsor Castle, located just west of London, is one of the great royal

residencies of England. In the early eighteenth century, the castle was
surrounded by a great forest, full of deer, though little of this remains
today. One of the keepers of the forest in 1722, Baptist Nunn, was
locked in to a violent conflict. On June 27 he recorded,

Blacks came in the night shot at me 3 times 2 bullets into
my chamber window and [I] agreed to pay them 5 guineas
at Crowthorne on the 30th.

Another entry in Nunn’s diary read, “A fresh surprise. One
appeared disguised with a message of destruction.”

Who were these mysterious “Blacks” making threats, shooting at
Nunn, and demanding money? The Blacks were groups of local men
who had their faces “blacked” to conceal their appearance at night.
They appeared widely across southern England in this period, killing
and maiming deer and other animals, burning down haystacks and
barns, and destroying fences and fish ponds. On the surface it was
sheer lawlessness, but it wasn’t. Illegal hunting (poaching) deer in
lands owned by the king or other members of the aristocracy had
been going on for a long time. In the 1640s, during the Civil War, the
entire population of deer at Windsor Castle was killed. After the
Restoration in 1660, when Charles II came to the throne, the deer
park was restocked. But the Blacks were not just poaching deer to eat;
they also engaged in wanton destruction. To what end?

A crucial building block of the Glorious Revolution of 1688 was the
pluralistic nature of interests represented in Parliament. None of the
merchants, industrialists, gentry, or aristocracy allied with William of
Orange and then with the Hanoverian monarchs, who succeeded
Queen Anne in 1714, were strong enough to impose their will
unilaterally.

Attempts at restoring the Stuart monarchy continued throughout
much of the eighteenth century. After James II’s death in 1701, his
son, James Francis Edward Stuart, the “Old Pretender,” was
recognized as the lawful heir to the English Crown by France, Spain,
the pope, and supporters of the Stuart monarchy in England and
Scotland, the so-called Jacobites. In 1708 the Old Pretender
attempted to take back the throne with support of French troops, but
was unsuccessful. In the ensuing decades there would be several
Jacobite revolts, including major ones in 1715 and 1719. In 1745-46,
the Old Pretender’s son, Charles Edward Stuart, the “Young
Pretender,” made an attempt to take back the throne, but his forces
were defeated by the British army.

The Whig political party, which as we saw (this page-this page)
was founded in the 1670s to represent the new mercantile and
economic interests, was the main organization behind the Glorious
Revolution, and the Whigs dominated Parliament from 1714 to 1760.
Once in power, they were tempted to use their newly found position
to prey on the rights of others, to have their cake and eat it, too. They
were no different from the Stuart kings, but their power was far from
absolute. It was constrained both by competing groups in Parliament,
particularly the Tory Party which had formed to oppose the Whigs,
and by the very institutions that they had fought to introduce to
strengthen Parliament and to prevent the emergence of a new
absolutism and the return of the Stuarts. The pluralistic nature of
society that emerged from the Glorious Revolution also meant that
the population at large, even those without formal representation in
Parliament, had been empowered, and “blacking” was precisely a
response by the common people to perceptions that the Whigs were
exploiting their position.

The case of William Cadogan, a successful general in the War of the
Spanish Succession between 1701 and 1714 and in the suppression of
the Jacobite revolts, illustrates the sort of encroachment of common
people’s rights by the Whigs that led to blacking. George I made
Cadogan a baron in 1716 and then an earl in 1718. He was also an
influential member of the Regency Council of Lords Justices, which
presided over major affairs of state, and he served as the acting
commander in chief. He bought a large property of about a thousand
acres at Caversham, about twenty miles west of Windsor. There he
built a grand house and ornate gardens and laid out a 240-acre deer
park. Yet this property was consolidated by encroaching on the rights
of those around the estate. People were evicted, and their traditional
rights to graze animals and collect peat and firewood were abrogated.
Cadogan faced the wrath of the Blacks. On January 1, 1722, and
again in July, the park was raided by mounted and armed Blacks. The
first attack killed sixteen deer. Earl Cadogan was not alone. The
estates of many notable landowners and politicians were also raided
by the Blacks.

The Whig government was not going to take this lying down. In
May 1723, Parliament passed the Black Act, which created an
extraordinary fifty new offenses that were punishable by hanging. The
Black Act made it a crime not only to carry weapons but to have a
blackened face. The law in fact was soon amended to make blacking
punishable by hanging. The Whig elites went about implementing the
law with gusto. Baptist Nunn set up a network of informers in
Windsor Forest to discover the identity of the Blacks. Soon several
were arrested. The transition from arrest to hanging ought to have
been a straightforward affair. After all, the Black Act had already
been enacted, the Whigs were in charge of Parliament, Parliament
was in charge of the country, and the Blacks were acting directly
contrary to the interests of some powerful Whigs. Even Sir Robert
Walpole, secretary of state, then prime minister — and like Cadogan,
another influential member of the Regency Council of the Lords
Justices — was involved. He had a vested interest in Richmond Park in
southwest London, which had been created out of common land by

Charles I. This park also encroached upon the traditional rights of
local residents to graze their animals, hunt hares and rabbits, and
collect firewood. But the ending of these rights appears to have been
rather laxly enforced, and grazing and hunting continued, until
Walpole arranged for his son to become the park ranger. At this time,
the park was closed off, a new wall was constructed, and man traps
were installed. Walpole liked hunting deer, and he had a lodge built
for himself at Houghton, within the park. The animosity of local
Blacks was soon ignited.

On November 10, 1724, a local resident outside the park, John
Huntridge, was accused of aiding deer stealers and abetting known
Blacks, both crimes punishable by hanging. The prosecution of
Huntridge came right from the top, initiated by the Regency Council
of Lords Justices, which Walpole and Cadogan dominated. Walpole
went so far as to extract evidence himself as to Huntridge’s guilt from
an informant, Richard Blackburn. Conviction ought to have been a
foregone conclusion, but it wasn’t. After a trial of eight or nine hours,
the jury found Huntridge innocent, partly on procedural grounds,
since there were irregularities with the way the evidence had been
collected.

Not all Blacks or those who sympathized with them were as lucky
as Huntridge. Though some others were also acquitted or had their
convictions commuted, many were hanged or transported to the penal
colony of choice at the time, North America; the law in fact stayed on
the statute books until it was repealed in 1824. Yet Huntridge’s
victory is remarkable. The jury was made up not of Huntridge’s peers,
but of major landowners and gentry, who ought to have sympathized
with Walpole. But this was no longer the seventeenth century, where
the Court of Star Chamber would simply follow the wishes of Stuart
monarchs and act as an open tool of repression against their
opponents, and where kings could remove judges whose decisions
they did not like. Now the Whigs also had to abide by the rule of law,
the principle that laws should not be applied selectively or arbitrarily
and that nobody is above the law.

The events surrounding the Black Act would show that the Glorious
Revolution had created the rule of law, and that this notion was
stronger in England and Britain, and the elites were far more
constrained by it than they themselves imagined. Notably, the rule of
law is not the same as rule by law. Even if the Whigs could pass a
harsh, repressive law to quash obstacles from common people, they
had to contend with additional constraints because of the rule of law.
Their law violated the rights that the Glorious Revolution and the
changes in political institutions that followed from it had already
established for everybody by tearing down the “divine” rights of kings
and the privileges of elites. The rule of law then implied that both
elites and nonelites alike would resist its implementation.

The rule of law is a very strange concept when you think about it in
historical perspective. Why should laws be applied equally to all? If
the king and the aristocracy have political power and the rest don’t,
it’s only natural that whatever is fair game for the king and the
aristocracy should be banned and punishable for the rest. Indeed, the
rule of law is not imaginable under absolutist political institutions. It
is a creation of pluralist political institutions and of the broad
coalitions that support such pluralism. It’s only when many
individuals and groups have a say in decisions, and the political
power to have a seat at the table, that the idea that they should all be
treated fairly starts making sense. By the early eighteenth century,
Britain was becoming sufficiently pluralistic, and the Whig elites
would discover that, as enshrined in the notion of the rule of law,
laws and institutions would constrain them, too.

But why did the Whigs and parliamentarians abide by such
restraints? Why didn’t they use their control over Parliament and the
state to force an uncompromising implementation of the Black Act
and overturn the courts when the decisions didn’t go their way? The
answer reveals much about the nature of the Glorious Revolution —
why it didn’t just replace an old absolutism with a new version — the
link between pluralism and the rule of law, and the dynamics of
virtuous circles. As we saw in chapter 7, the Glorious Revolution was
not the overthrow of one elite by another, but a revolution against

absolutism by a broad coalition made up of the gentry, merchants,
and manufacturers as well as groupings of Whigs and Tories. The
emergence of pluralist political institutions was a consequence of this
revolution. The rule of law also emerged as a by-product of this
process. With many parties at the table sharing power, it was natural
to have laws and constraints apply to all of them, lest one party start
amassing too much power and ultimately undermine the very
foundations of pluralism. Thus the notion that there were limits and
restraints on rulers, the essence of the rule of law, was part of the
logic of pluralism engendered by the broad coalition that made up the
opposition to Stuart absolutism.

In this light, it should be no surprise that the principle of the rule of
law, coupled with the notion that monarchs did not have divine
rights, was in fact a key argument against Stuart absolutism. As the
British historian E. P. Thompson put it, in the struggle against the
Stuart monarchs:

immense efforts were made ... to project the image of a
ruling class which was itself subject to the rule of law, and
whose legitimacy rested upon the equity and universality
of those legal forms. And the rulers were, in serious
senses, whether willingly or unwillingly, the prisoners of
their own rhetoric; they played games of power according
to rules which suited them, but they could not break those
rules or the whole game would be thrown away.

Throwing the game away would destabilize the system and open
the way for absolutism by a subset of the broad coalition or even risk
the return of the Stuarts. In Thompson’s words, what inhibited
Parliament from creating a new absolutism was that

take away law, and the royal prerogative ... might flood
back upon their properties and lives.

Moreover,

it was inherent in the very nature of the medium which
they [those aristocrats, merchants etc. fighting the Crown]
had selected for their own self-defense that it could not be
reserved for the exclusive use only of their own class. The
law, in its forms and traditions, entailed principles of
equity and universality which . . . had to be extended to all
sorts and degrees of men.

Once in place, the notion of the rule of law not only kept
absolutism at bay but also created a type of virtuous circle: if the laws
applied equally to everybody, then no individual or group, not even
Cadogan or Walpole, could rise above the law, and common people
accused of encroaching on private property still had the right to a fair
trial.

We saw how inclusive economic and political institutions emerge. But
why do they persist over time? The history of the Black Act and the
limits to its implementation illustrate the virtuous circle, a powerful
process of positive feedback that preserves these institutions in the
face of attempts at undermining them and, in fact, sets in motion
forces that lead to greater inclusiveness. The logic of virtuous circles
stems partly from the fact that inclusive institutions are based on
constraints on the exercise of power and on a pluralistic distribution
of political power in society, enshrined in the rule of law. The ability
of a subset to impose its will on others without any constraints, even
if those others are ordinary citizens, as Huntridge was, threatens this
very balance. If it were temporarily suspended in the case of the
peasants protesting against elites encroaching on their communal
lands, what was there to guarantee that it would not be suspended
again? And the next time it was suspended, what would prevent the
Crown and aristocracy from taking back what the merchants,
businessmen, and the gentry had gained in the intervening half
century? In fact, the next time it was suspended, perhaps the entire
project of pluralism would come crumbling down, because a narrow
set of interests would take control at the expense of the broad

coalition. The political system would not risk this. But this made
pluralism, and the rule of law that it implied, persistent features of
British political institutions. And we will see that once pluralism and
the rule of law were established, there would be demand for even
greater pluralism and greater participation in the political process.

The virtuous circle arises not only from the inherent logic of
pluralism and the rule of law, but also because inclusive political
institutions tend to support inclusive economic institutions. This then
leads to a more equal distribution of income, empowering a broad
segment of society and making the political playing field even more
level. This limits what one can achieve by usurping political power
and reduces the incentives to re-create extractive political institutions.
These factors were important in the emergence of truly democratic
political institutions in Britain.

Pluralism also creates a more open system and allows independent
media to flourish, making it easier for groups that have an interest in
the continuation of inclusive institutions to become aware and
organize against threats to these institutions. It is highly significant
that the English state stopped censoring the media after 1688. The
media played a similarly important role in empowering the
population at large and in the continuation of the virtuous circle of
institutional development in the United States, as we will see in this
chapter.

While the virtuous circle creates a tendency for inclusive
institutions to persist, it is neither inevitable nor irreversible. Both in
Britain and the United States, inclusive economic and political
institutions were subject to many challenges. In 1745 the Young
Pretender got all the way to Derby, a mere hundred miles from
London, with an army to unseat the political institutions forged
during the Glorious Revolution. But he was defeated. More important
than the challenges from without were potential challenges from
within that might also have led to the unraveling of inclusive
institutions. As we saw in the context of the Peterloo Massacre in
Manchester in 1819 (this page), and as we will see in more detail
next, British political elites thought of using repression to avoid

having to further open the political system, but they pulled back from
the brink. Similarly, inclusive economic and political institutions in
the United States faced serious challenges, which could have
conceivably succeeded, but didn’t. And of course it was not
preordained that these challenges should be defeated. It is due to not
only the virtuous circle but also to the realization of the contingent
path of history that British and U.S. inclusive institutions survived
and became substantially stronger over time.

The Slow March of Democracy

The response to the Black Act showed ordinary British people that
they had more rights than they previously realized. They could
defend their traditional rights and economic interests in the courts
and in Parliament through the use of petitions and lobbying. But this
pluralism had not yet delivered effective democracy. Most adult men
could not vote; neither could women; and there were many inequities
in the existing democratic structures. All this was to change. The
virtuous circle of inclusive institutions not only preserves what has
already been achieved but also opens the door to greater
inclusiveness. The odds were against the British elite of the
eighteenth century maintaining their grip on political power without
serious challenges. This elite had come to power by challenging the
divine right of kings and opening the door to participation by the
people in politics, but then they gave this right only to a small
minority. It was only a matter of time until more and more of the
population demanded the right to participate in the political process.
And in the years leading up to 1831, they did.

The first three decades of the nineteenth century witnessed
increasing social unrest in Britain, mostly in response to increasing
economic inequities and demands from the disenfranchised masses for
greater political representation. The Luddite Riots of 1811-1816,
where workers fought against the introduction of new technologies
they believed would reduce their wages, were followed by riots
explicitly demanding political rights, the Spa Fields Riots of 1816 in

London and the Peterloo Massacre of 1819 in Manchester. In the
Swing Riots of 1830, agricultural workers protested against falling
living standards as well as the introduction of new technology.
Meanwhile, in Paris, the July Revolution of 1830 exploded. A
consensus among elites was starting to form that the discontent was
reaching the boiling point, and the only way to defuse social unrest,
and turn back a revolution, was by meeting the demands of the
masses and undertaking parliamentary reform.

It was no surprise then that the 1831 election was mostly about a
single issue: political reform. The Whigs, almost one hundred years
after Sir Robert Walpole, were much more responsive to the wishes of
the common man and campaigned to extend voting rights. But this
meant only a small increase in the electorate. Universal suffrage, even
only for men, was not on the table. The Whigs won the election, and
their leader, Earl Grey, became the prime minister. Earl Grey was no
radical — far from it. He and the Whigs pushed for reform not because
they thought a broader voting franchise was more just or because
they wanted to share power. British democracy was not given by the
elite. It was largely taken by the masses, who were empowered by the
political processes that had been ongoing in England and the rest of
Britain for the last several centuries. They had become emboldened
by the changes in the nature of political institutions unleashed by the
Glorious Revolution. Reforms were granted because the elite thought
that reform was the only way to secure the continuation of their rule,
albeit in a somewhat lessened form. Earl Grey, in his famous speech
to Parliament in favor of political reform, said this very clearly:

There is no-one more decided against annual Parliaments,
universal suffrage and the ballot, than I am. My object is
not to favour, but to put an end to such hopes and
projects ... The principle of my reform is, to prevent the
necessity of revolution . . . reforming to preserve and not to
overthrow.

The masses did not just want the vote for its own sake but to have a

seat at the table to be able to defend their interests. This was well
understood by the Chartist movement, which led the campaign for
universal suffrage after 1838, taking its name from its adoption of the
People’s Charter, named to evoke a parallel with the Magna Carta.
Chartist J. R. Stephens articulated why universal suffrage, and the
vote for all citizens, was key for the masses:

The question of universal suffrage ... is a knife and fork
question, a bread and cheese question ... by universal
suffrage I mean to say that every working man in the land
has a right to a good coat on his back, a good hat on his
head, a good roof for the shelter of his household, a good
dinner upon his table.

Stephens had well understood that universal suffrage was the most
durable way of empowering the British masses further and
guaranteeing a coat, a hat, a roof, and a good dinner for the working
man.

Ultimately, Earl Grey was successful both in ensuring the passage of
the First Reform Act and in defusing the revolutionary tides without
taking any major strides toward universal mass suffrage. The 1832
reforms were modest, only doubling the voting franchise from 8
percent to about 16 percent of the adult male population (from about
2 to 4 percent of all the population). They also got rid of rotten
boroughs and gave independent representation to the new
industrializing cities such as Manchester, Leeds, and Sheffield. But
this still left many issues unresolved. Hence there were soon further
demands for greater voting rights and further social unrest. In
response, further reform would follow.

Why did the British elites give in to the demands? Why did Earl
Grey feel that partial — indeed, very partial — reform was the only way
to preserve the system? Why did they have to put up with the lesser
of the two evils, reform or revolution, rather than maintaining their
power without any reform? Couldn’t they just have done what the
Spanish conquistadors did in South America, what Austria-Hungarian

and Russian monarchs would do in the next several decades when the
demands for reform reached those lands, and what the British
themselves did in the Caribbean and in India: use force to put down
the demands? The answer to this question comes from the virtuous
circle. The economic and political changes that had already taken
place in Britain made using force to repress these demands both
unattractive for the elite and increasingly infeasible. As E. P.
Thompson wrote:

When the struggles of 1790-1832 signalled that this
equilibrium had changed, the rulers of England were faced
with alarming alternatives. They could either dispense
with the rule of law, dismantle their elaborate
constitutional structures, countermand their own rhetoric
and rule by force; or they could submit to their own rules
and surrender their hegemony ... they took halting steps
in the first direction. But in the end, rather than shatter
their own self-image and repudiate 150 years of
constitutional legality, they surrendered to the law.

Put differently, the same forces that made the British elite not wish
to tear down the edifice of the rule of law during the Black Act also
made them shun repression and rule by force, which would again risk
the stability of the entire system. If undermining the law in trying to
implement the Black Act would have weakened the system that
merchants, businessmen, and the gentry had built in the Glorious
Revolution, setting up a repressive dictatorship in 1832 would have
entirely undermined it. In fact, the organizers of the protests for
parliamentary reform were well aware of the importance of the rule
of law and its symbolism to the British political institutions during
this period. They used its rhetoric to bring home this point. One of
the first organizations seeking parliamentary reform was called the
Hampden Club, after the member of Parliament who had first resisted
Charles I over the ship money tax, a crucial event leading up to the
first major uprising against Stuart absolutism, as we saw in chapter 7.

There was also dynamic positive feedback between inclusive
economic and political institutions making such a course of action
attractive. Inclusive economic institutions led to the development of
inclusive markets, inducing a more efficient allocation of resources,
greater encouragement to acquire education and skills, and further
innovations in technology. All of these forces were in play in Britain
by 1831. Clamping down on popular demands and undertaking a
coup against inclusive political institutions would also destroy these
gains, and the elites opposing greater democratization and greater
inclusiveness might find themselves among those losing their fortunes
from this destruction.

Another aspect of this positive feedback is that under inclusive
economic and political institutions, controlling power became less
central. In Austria-Hungary and in Russia, as we saw in chapter 8, the
monarchs and the aristocracy had much to lose from industrialization
and reform. In contrast, in Britain at the beginning of the nineteenth
century, thanks to the development of inclusive economic institutions,
there was much less at stake: there were no serfs, relatively little
coercion in the labor market, and few monopolies protected by entry
barriers. Clinging to power was thus much less valuable for the
British elite.

The logic of the virtuous circle also meant that such repressive
steps would be increasingly infeasible, again because of the positive
feedback between inclusive economic and political institutions.
Inclusive economic institutions lead to a more equitable distribution
of resources than extractive institutions. As such, they empower the
citizens at large and thus create a more level playing field, even when
it comes to the fight for power. This makes it more difficult for a
small elite to crush the masses rather than to give in to their
demands, or at least to some of them. The British inclusive
institutions had also already unleashed the Industrial Revolution, and
Britain was highly urbanized. Using repression against an urban,
concentrated, and partially organized and empowered group of
people would have been much harder than repressing a peasantry or
dependent serfs.

The virtuous circle thus brought the First Reform Act to Britain in
1832. But this was just the beginning. There was still a long road to
travel toward real democracy, because in 1832 the elite had only
offered what they thought they had to and no more. The issue of
parliamentary reform was taken up by the Chartist movement, whose
People’s Charter of 1838 included the clauses

A vote for every man twenty-one years of age, of sound mind,
and not undergoing punishment for crime.

The ballot. — To protect the elector in the exercise of his vote.

No property qualification for members of Parliament — thus
enabling the constituencies to return the man of their choice,
be he rich or poor.

Payment of members, thus enabling an honest tradesman,
working man, or other person, to serve a constituency, when
taken from his business to attend to the interests of the
Country.

Equal Constituencies, securing the same amount of
representation for the same number of electors, instead of
allowing small constituencies to swamp the votes of large
ones.

Annual Parliaments, thus presenting the most effectual check
to bribery and intimidation, since though a constituency
might be bought once in seven years (even with the ballot),
no purse could buy a constituency (under a system of
universal suffrage) in each ensuing twelve-month; and since
members, when elected for a year only, would not be able to
defy and betray their constituents as now.

By the “ballot,” they meant the secret ballot and the end of open
voting, which had facilitated the buying of votes and the coercion of
voters.

The Chartist movement organized a series of mass demonstrations,
and throughout this period Parliament continually discussed the

potential for further reforms. Though the Chartists disintegrated after
1848, they were followed by the National Reform Union, founded in
1864, and the Reform League, which was founded in 1865. In July
1866, major pro-reform riots in Hyde Park brought reform right to
the top of the political agenda once more. This pressure bore
dividends in the form of the Second Reform Act of 1867, in which the
total electorate was doubled and working-class voters became the
majority in all urban constituencies. Shortly afterward the secret
ballot was introduced and moves were made to eliminate corrupt
electoral practices such as “treating” (essentially buying votes in
exchange for which the voter received a treat, usually money, food,
or alcohol). The electorate was doubled again by the Third Reform
Act of 1884, when 60 percent of adult males were enfranchised.
Following the First World War, the Representation of the People Act
of 1918 gave the vote to all adult males over the age of twenty-one,
and to women over the age of thirty who were taxpayers or married
to taxpayers. Ultimately, all women also received the vote on the
same terms as men in 1928. The measures of 1918 were negotiated
during the war and reflected a quid pro quo between the government
and the working classes, who were needed to fight and produce
munitions. The government may also have taken note of the
radicalism of the Russian Revolution.

Parallel with the gradual development of more inclusive political
institutions was a movement toward even more inclusive economic
institutions. One major consequence of the First Reform Act was the
repeal of the Corn Laws in 1846. As we saw in chapter 7, the Corn
Laws banned the import of grains and cereals, keeping their prices
high and ensuring lucrative profits for large landowners. The new
parliamentarians from Manchester and Birmingham wanted cheap
corn and low wages. They won, and the landed interests suffered a
major defeat.

The changes in the electorate and other dimensions of political
institutions taking place during the course of the nineteenth century
were followed by further reforms. In 1871 the Liberal prime minister
Gladstone opened up the civil service to public examination, making

it meritocratic, and thus continuing the process of political
centralization and the building of state institutions that started during
the Tudor period. Liberal and Tory governments during this period
introduced a considerable amount of labor market legislation. For
example, the Masters and Servants Acts, which allowed employers to
use the law to reduce the mobility of their workers, was repealed,
changing the nature of labor relations in favor of workers. During
1906-1914, the Liberal Party, under the leadership of H. H. Asquith
and David Lloyd George, began to use the state to provide far more
public services, including health and unemployment insurance,
government-financed pensions, minimum wages, and a commitment
to redistributive taxation. As a result of these fiscal changes, taxes as
a proportion of national product more than doubled in the last three
decades of the nineteenth century, and then doubled again in the first
three decades of the twentieth. The tax system also became more
“progressive,” so that wealthier people bore a heavier burden.

Meanwhile, the education system, which was previously either
primarily for the elite, run by religious denominations, or required
poor people to pay fees, was made more accessible to the masses; the
Education Act of 1870 committed the government to the systematic
provision of universal education for the first time. Education became
free of charge in 1891. The school-leaving age was set at eleven in
1893. In 1899 it was increased to twelve, and special provisions for
the children of needy families were introduced. As a result of these
changes, the proportion of ten-year-olds enrolled in school, which
stood at a disappointing 40 percent in 1870, increased to 100 percent
in 1900. Finally, the Education Act of 1902 led to a large expansion
in resources for schools and introduced the grammar schools, which
subsequently became the foundation of secondary education in
Britain.

In fact, the British example, an illustration of the virtuous circle of
inclusive institutions, provides an example of a “gradual virtuous
circle.” The political changes were unmistakably toward more
inclusive political institutions and were the result of demands from
empowered masses. But they were also gradual. Every decade another

step, sometimes smaller, sometimes larger, was taken toward
democracy. There was conflict over each step, and the outcome of
each was contingent. But the virtuous circle created forces that
reduced the stakes involved in clinging to power. It also spurred the
rule of law, making it harder to use force against those who were
demanding what these elites had themselves demanded from Stuart
monarchs. It became less likely that this conflict would turn into an
all-out revolution and more likely that it would be resolved in favor
of greater inclusiveness. There is great virtue in this sort of gradual
change. It is less threatening to the elite than the wholesale
overthrow of the system. Each step is small, and it makes sense to
give in to a small demand rather than create a major showdown. This
partly explains how the Corn Law was repealed without more serious
conflict. By 1846 landowners could no longer control legislation in
Parliament. This was an outcome of the First Reform Act. However, if
in 1832 the expansion of the electorate, the reform of the rotten
boroughs, and the repeal of the Corn Laws had all been on the table,
landowners would have put up much more resistance. The fact that
there were first limited political reforms and that repeal of the Corn
Laws came on the agenda only later defused conflict.

Gradual change also prevented ventures into uncharted territories.
A violent overthrow of the system means that something entirely new
has to be built in place of what has been removed. This was the case
with the French Revolution, when the first experiment with
democracy led to the Terror and then back to a monarchy twice
before finally leading to the French Third Republic in 1870. It was the
case in the Russian Revolution, where the desires of many for a more
equal system than that of the Russian Empire led to a one-party
dictatorship that was much more violent, bloody, and vicious than
what it had replaced. Gradual reform was difficult in these societies
precisely because they lacked pluralism and were highly extractive. It
was the pluralism emerging from the Glorious Revolution, and the
rule of law that it introduced, that made gradual change feasible, and
desirable, in Britain.

The conservative English commentator Edmund Burke, who

steadfastly opposed the French Revolution, wrote in 1790, “It is with
infinite caution that any man should venture upon pulling down an
edifice, which has answered in any tolerable degree for ages the
common purposes of society, or on building it up again without
having models and patterns of approved utility before his eyes.”
Burke was wrong on the big picture. The French Revolution had
replaced a rotten edifice and opened the way for inclusive institutions
not only in France, but throughout much of Western Europe. But
Burke’s caution was not entirely off the mark. The gradual process of
British political reform, which had started in 1688 and would pick up
pace three decades after Burke’s death, would be more effective
because its gradual nature made it more powerful, harder to resist,
and ultimately more durable.

Busting Trusts

Inclusive institutions in the United States had their roots in the
struggles in Virginia, Maryland, and the Carolinas during the colonial
period (this page-this page). These institutions were reinforced by the
Constitution of the United States, with its system of constraints and its
separation of powers. But the Constitution did not mark the end of
the development of inclusive institutions. Just as in Britain, these
were strengthened by a process of positive feedback, based on the
virtuous circle.

By the middle of the nineteenth century, all white males, though
not women or blacks, could vote in the United States. Economic
institutions became more inclusive — for example, with the passage of
the Homestead Act in 1862 (this page), which made frontier land
available to potential settlers rather than allocating these lands to
political elites. But just as in Britain, challenges to inclusive
institutions were never entirely absent. The end of the U.S. Civil War
initiated a rapid spurt of economic growth in the North. As railways,
industry, and commerce expanded, a few people made vast fortunes.
Emboldened by their economic success, these men and their
companies became increasingly unscrupulous. They were called the

Robber Barons because of their hard-nosed business practices aimed
at consolidating monopolies and preventing any potential competitor
from entering the market or doing business on an equal footing. One
of the most notorious of these was Cornelius Vanderbilt, who
famously remarked, “What do I care about the Law? Hain’t I got the
power?”

Another was John D. Rockefeller, who started the Standard Oil
Company in 1870. He quickly eliminated rivals in Cleveland and
attempted to monopolize the transportation and retailing of oil and
oil products. By 1882 he had created a massive monopoly — in the
language of the day, a trust. By 1890 Standard Oil controlled 88
percent of the refined oil flows in the United States, and Rockefeller
became the world’s first billionaire in 1916. Contemporary cartoons
depict Standard Oil as an octopus wrapping itself around not just the
oil industry but also Capitol Hill.

Almost as infamous was John Pierpont Morgan, the founder of the
modern banking conglomerate J.P. Morgan, which later, after many
mergers over decades, eventually became JPMorgan Chase. Along
with Andrew Carnegie, Morgan founded the U.S. Steel Company in
1901, the first corporation with a capitalized value of more than $1
billion and by far the largest steel corporation in the world. In the
1890s, large trusts began to emerge in nearly every sector of the
economy, and many of them controlled more than 70 percent of the
market in their sector. These included several household names, such
as Du Pont, Eastman Kodak, and International Harvester. Historically
the United States, at least the northern and midwestern United States,
had relatively competitive markets and had been more egalitarian
than other parts of the country, particularly the South. But during this
period, competition gave way to monopoly, and wealth inequality
rapidly increased.

The pluralistic U.S. political system already empowered a broad
segment of society that could stand up against such encroachments.
Those who were the victims of the monopolistic practices of the
Robber Barons, or who objected to their unscrupulous domination of
their industries, began to organize against them. They formed the

Populist and then subsequently the Progressive movements.

The Populist movement emerged out of a long-running agrarian
crisis, which afflicted the Midwest from the late 1860s onward. The
National Grange of the Order of Patrons of Husbandry, known as the
Grangers, was founded in 1867 and began to mobilize farmers against
unfair and discriminatory business practices. In 1873 and 1874, the
Grangers won control of eleven midwestern state legislatures, and
rural discontent culminated in the formation of the People’s Party in
1892, which got 8.5 percent of the popular vote in the 1892
presidential election. In the next two elections, the Populists fell in
behind the two unsuccessful Democratic campaigns by William
Jennings Bryan, who made many of their issues his own. Grass-roots
opposition to the spread of the trusts had now organized to try to
counteract the influence that Rockefeller and other Robber Barons
were exerting over national politics.

These political movements slowly began to have an impact on
political attitudes and then on legislation, particularly concerning the
role of the state in the regulation of monopoly. The first important
piece of legislation was the Interstate Commerce Act of 1887, which
created the Interstate Commerce Commission and initiated the
development of the federal regulation of industry. This was quickly
followed by the Sherman Antitrust Act of 1890. The Sherman Act,
which is still a major part of U.S. antitrust regulation, would become
the basis for attacks on the Robber Barons’ trusts. Major action
against the trusts came after the election of presidents committed to
reform and to limiting the power of the Robber Barons: Theodore
Roosevelt, 1901-1909; William Taft, 1909-1913; and Woodrow
Wilson, 1913-1921.

A key political force behind antitrust and the move to impose
federal regulation of industry was again the farm vote. Early attempts
by individual states in the 1870s to regulate railroads came from
farmers’ organizations. Indeed, nearly all the fifty-nine petitions that
concerned trusts sent to Congress prior to the enactment of the
Sherman Act came from farming states and emanated from
organizations such as the Farmers’ Union, Farmers’ Alliance, Farmers’

Mutual Benefit Association, and Patrons of Animal Husbandry.
Farmers found a collective interest in opposing the monopolistic
practices of industry.

From the ashes of the Populists, who seriously declined after
throwing their weight behind the Democrats, came the Progressives, a
heterogeneous reform movement concerned with many of the same
issues. The Progressive movement initially gelled around the figure of
Teddy Roosevelt, who was William McKinley’s vice president and
who assumed the presidency following McKinley’s assassination in
1901. Prior to his rise to national office, Roosevelt had been an
uncompromising governor of New York and had worked hard to
eliminate political corruption and “machine politics.” In his first
address to Congress, Roosevelt turned his attention to the trusts. He
argued that the prosperity of the United States was based on market
economy and the ingenuity of businessmen, but at the same time,

there are real and grave evils ... and a ... widespread
conviction in the minds of the American people that the
great corporations known as trusts are in certain of their
features and tendencies hurtful to the general welfare.

This springs from no spirit of envy or un-charitableness,
nor lack of pride in the great industrial achievements that
have placed this country at the head of the nations
struggling for commercial supremacy. It does not rest
upon a lack of intelligent appreciation of the necessity of
meeting changing and changed conditions of trade with
new methods, nor upon ignorance of the fact that
combination of capital in the effort to accomplish great
things is necessary when the world’s progress demands
that great things be done. It is based upon sincere
conviction that combination and concentration should be,
not prohibited, but supervised and within reasonable
limits controlled; and in my judgment this conviction is
right.

He continued: “It should be as much the aim of those who seek for
social betterment to rid the business world of crimes of cunning as to
rid the entire body politic of crimes of violence.” His conclusion was
that

in the interest of the whole people, the nation should,
without interfering with the power of the states in the
matter itself, also assume power of supervision and
regulation over all corporations doing an interstate
business. This is especially true where the corporation
derives a portion of its wealth from the existence of some
monopolistic element or tendency in its business.

Roosevelt proposed that Congress establish a federal agency with
power to investigate the affairs of the great corporations and that, if
necessary, a constitutional amendment could be used to create such
an agency. By 1902 Roosevelt had used the Sherman Act to break up
the Northern Securities Company, affecting the interests of J.P.
Morgan, and subsequent suits had been brought against Du Pont, the
American Tobacco Company, and the Standard Oil Company.
Roosevelt strengthened the Interstate Commerce Act with the
Hepburn Act of 1906, which increased the powers of the Interstate
Commerce Commission, particularly allowing it to inspect the
financial accounts of railways and extending its authority into new
spheres. Roosevelt’s successor, William Taft, prosecuted trusts even
more assiduously, the high point of this being the breakup of the
Standard Oil Company in 1911. Taft also promoted other important
reforms, such as the introduction of a federal income tax, which came
with the ratification of the Sixteenth Amendment in 1913.

The apogee of Progressive reforms came with the election of
Woodrow Wilson in 1912. Wilson noted in his 1913 book, The New
Freedom, “If monopoly persists, monopoly will always sit at the helm
of government. I do not expect to see monopoly restrain itself. If there
are men in this country big enough to own the government of the
United States, they are going to own it.”

Wilson worked to pass the Clayton Antitrust Act in 1914,
strengthening the Sherman Act, and he created the Federal Trade
Commission, which enforced the Clayton Act. In addition, under the
impetus of the investigation of the Pujo Committee, led by Louisiana
congressman Arsene Pujo, into the “money trust,” the spread of
monopoly into the financial industry, Wilson moved to increase
regulation of the financial sector. In 1913 he created the Federal
Reserve Board, which would regulate monopolistic activities in the
financial sector.

The rise of Robber Barons and their monopoly trusts in the late
nineteenth and early twentieth centuries underscores that, as we
already emphasized in chapter 3, the presence of markets is not by
itself a guarantee of inclusive institutions. Markets can be dominated
by a few firms, charging exorbitant prices and blocking the entry of
more efficient rivals and new technologies. Markets, left to their own
devices, can cease to be inclusive, becoming increasingly dominated
by the economically and politically powerful. Inclusive economic
institutions require not just markets, but inclusive markets that create
a level playing field and economic opportunities for the majority of
the people. Widespread monopoly, backed by the political power of
the elite, contradicts this. But the reaction to the monopoly trusts also
illustrates that when political institutions are inclusive, they create a
countervailing force against movements away from inclusive markets.
This is the virtuous circle in action. Inclusive economic institutions
provide foundations upon which inclusive political institutions can
flourish, while inclusive political institutions restrict deviations away
from inclusive economic institutions. Trust busting in the United
States, in contrast to what we have seen in Mexico (this page-this
page), illustrates this facet of the virtuous circle. While there is no
political body in Mexico restricting Carlos Slim’s monopoly, the
Sherman and Clayton Acts have been used repeatedly in the United
States over the past century to restrict trusts, monopolies, and cartels,
and to ensure that markets remain inclusive.

The U.S. experience in the first half of the twentieth century also
emphasizes the important role of free media in empowering broad

segments of society and thus in the virtuous circle. In 1906 Roosevelt
coined the term muckraker, based on a literary character, the man
with the muckrake in Bunyan’s Pilgrim’s Progress, to describe what he
regarded as intrusive journalism. The term stuck and came to
symbolize journalists who were intrusively, but also effectively,
exposing the excesses of Robber Barons as well as corruption in local
and federal politics. Perhaps the most famous muckraker was Ida
Tarbell, whose 1904 book, History of the Standard Oil Company, played
a key role in moving public opinion against Rockefeller and his
business interests, culminating in the breakup of Standard Oil in
1911. Another key muckraker was lawyer and author Louis Brandeis,
who would later be named Supreme Court justice by President
Wilson. Brandeis outlined a series of financial scandals in his book
Other People’s Money and How Bankers Use It, and was highly
influential on the Pujo Committee. The newspaper magnate William
Randolph Hearst also played a salient role as muckraker. His
serialization in his magazine The Cosmopolitan in 1906 of articles by
David Graham Phillips, called “The Treason of the Senate,”
galvanized the campaign to introduce direct elections for the Senate,
another key Progressive reform that happened with the enactment of
the Seventeenth Amendment to the U.S. constitution in 1913.

The muckrakers played a major role in inducing politicians to take
action against the trusts. The Robber Barons hated the muckrakers,
but the political institutions of the United States made it impossible
for them to stamp out and silence them. Inclusive political institutions
allow a free media to flourish, and a free media, in turn, makes it
more likely that threats against inclusive economic and political
institutions will be widely known and resisted. In contrast, such
freedom is impossible under extractive political institutions, under
absolutism, or under dictatorships, which helps extractive regimes to
prevent serious opposition from forming in the first place. The
information that the free media provided was clearly key during the
first half of the twentieth century in the United States. Without this
information, the U.S. public would not have known the true extent of
the power and abuses of the Robber Barons and would not have

mobilized against their trusts.

Packing the Court

Franklin D. Roosevelt, the Democratic Party candidate and cousin of
Teddy Roosevelt, was elected president in 1932 in the midst of the
Great Depression. He came to power with a popular mandate to
implement an ambitious set of policies for combating the Great
Depression. At the time of his inauguration in early 1933, one-quarter
of the labor force was unemployed, with many thrown into poverty.
Industrial production had fallen by over half since the Depression hit
in 1929, and investment had collapsed. The policies Roosevelt
proposed to counteract this situation were collectively known as the
New Deal. Roosevelt had won a solid victory, with 57 percent of the
popular vote, and the Democratic Party had majorities in both the
Congress and Senate, enough to pass New Deal legislation. However,
some of the legislation raised constitutional issues and ended up in
the Supreme Court, where Roosevelt’s electoral mandate cut much
less ice.

One of the key pillars of the New Deal was the National Industrial
Recovery Act. Title I focused on industrial recovery. President
Roosevelt and his team believed that restraining industrial
competition, giving workers greater rights to form trade unions, and
regulating working standards were crucial to the recovery effort. Title
II established the Public Works Administration, whose infrastructure
projects include such landmarks as the Thirtieth Street railroad
station in Philadelphia, the Triborough Bridge, the Grand Coulee
Dam, and the Overseas Highway connecting Key West, Florida, with
the mainland. President Roosevelt signed the bill into law on June 16,
1933, and the National Industrial Recovery Act was put into
operation. However, it immediately faced challenges in the courts. On
May 27, 1935, the Supreme Court unanimously ruled that Title I of
the act was unconstitutional. Their verdict noted solemnly,
“Extraordinary conditions may call for extraordinary remedies.
But ... extraordinary conditions do not create or enlarge

constitutional power.”

Before the Court’s ruling came in, Roosevelt had moved to the next
step of his agenda and had signed the Social Security Act, which
introduced the modern welfare state into the United States: pensions
at retirement, unemployment benefits, aid to families with dependent
children, and some public health care and disability benefits. He also
signed the National Labor Relations Act, which further strengthened
the rights of workers to organize unions, engage in collective
bargaining, and conduct strikes against their employers. These
measures also faced challenges in the Supreme Court. As these were
making their way through the judiciary, Roosevelt was reelected in
1936 with a strong mandate, receiving 61 percent of the popular
vote.

With his popularity at record highs, Roosevelt had no intention of
letting the Supreme Court derail more of his policy agenda. He laid
out his plans in one of his regular Fireside Chats, which was
broadcast live on the radio on March 9, 1937. He started by pointing
out that in his first term, much-needed policies had only cleared the
Supreme Court by a whisker. He went on:

I am reminded of that evening in March, four years ago,
when I made my first radio report to you. We were then in
the midst of the great banking crisis. Soon after, with the
authority of the Congress, we asked the nation to turn
over all of its privately held gold, dollar for dollar, to the
government of the United States. Today’s recovery proves
how right that policy was. But when, almost two years
later, it came before the Supreme Court its
constitutionality was upheld only by a five-to-four vote.

The change of one vote would have thrown all the affairs
of this great nation back into hopeless chaos. In effect,
four justices ruled that the right under a private contract
to exact a pound of flesh was more sacred than the main
objectives of the Constitution to establish an enduring
nation.

Obviously, this should not be risked again. Roosevelt continued:

Last Thursday I described the American form of
government as a three-horse team provided by the
Constitution to the American people so that their field
might be plowed. The three horses are, of course, the three
branches of government — the Congress, the executive, and
the courts. Two of the horses, the Congress and the
executive, are pulling in unison today; the third is not.

Roosevelt then pointed out that the U.S. Constitution had not
actually endowed the Supreme Court with the right to challenge the
constitutionality of legislation, but that it had assumed this role in
1803. At the time, Justice Bushrod Washington had stipulated that
the Supreme Court should “presume in favor of [a law’s] validity until
its violation of the Constitution is proved beyond all reasonable
doubt.” Roosevelt then charged:

In the last four years the sound rule of giving statutes the
benefit of all reasonable doubt has been cast aside. The
Court has been acting not as a judicial body, but as a
policymaking body.

Roosevelt claimed that he had an electoral mandate to change this
situation and that “after consideration of what reform to propose the
only method which was clearly constitutional ... was to infuse new
blood into all our courts.” He also argued that the Supreme Court
judges were overworked, and the load was just too much for the older
justices — who happened to be the ones striking down his legislation.
He then proposed that all judges should face compulsory retirement
at the age of seventy and that he should be allowed to appoint up to
six new justices. This plan, which Roosevelt presented as the
Judiciary Reorganization Bill, would have sufficed to remove the
justices who had been appointed earlier by more conservative
administrations and who had most strenuously opposed the New
Deal.

Though Roosevelt skillfully tried to win popular support for the
measure, opinion polls suggested that only about 40 percent of the
population was in favor of the plan. Louis Brandeis was now a
Supreme Court justice. Though Brandeis sympathized with much of
Roosevelt’s legislation, he spoke against the president’s attempts to
erode the power of the Supreme Court and his allegations that the
justices were overworked. Roosevelt’s Democratic Party had large
majorities in both houses of Congress. But the House of
Representatives more or less refused to deal with Roosevelt’s bill.
Roosevelt then tried the Senate. The bill was sent to the Senate
Judiciary Committee, which then held highly contentious meetings,
soliciting various opinions on the bill. They ultimately sent it back to
the Senate floor with a negative report, arguing that the bill was a
“needless, futile and utterly dangerous abandonment of constitutional
principle ... without precedent or justification.” The Senate voted 70
to 20 to send it back to committee to be rewritten. All the “court
packing” elements were stripped away. Roosevelt would be unable to
remove the constraints placed on his power by the Supreme Court.
Even though Roosevelt’s powers remained constrained, there were
compromises, and the Social Security and the National Labor
Relations Acts were both ruled constitutional by the Court.

More important than the fate of these two acts was the general
lesson from this episode. Inclusive political institutions not only check
major deviations from inclusive economic institutions, but they also
resist attempts to undermine their own continuation. It was in the
immediate interests of the Democratic Congress and Senate to pack
the court and ensure that all New Deal legislation survived. But in the
same way that British political elites in the early eighteenth century
understood that suspending the rule of law would endanger the gains
they had wrested from the monarchy, congressmen and senators
understood that if the president could undermine the independence of
the judiciary, then this would undermine the balance of power in the
system that protected them from the president and ensured the
continuity of pluralistic political institutions.

Perhaps Roosevelt would have decided next that obtaining

legislative majorities took too much compromise and time and that he
would instead rule by decree, totally undermining pluralism and the
U.S. political system. Congress certainly would not have approved
this, but then Roosevelt could have appealed to the nation, asserting
that Congress was impeding the necessary measures to fight the
Depression. He could have used the police to close Congress. Sound
farfetched? This is exactly what happened in Peru and Venezuela in
the 1990s. Presidents Fujimori and Chavez appealed to their popular
mandate to close uncooperative congresses and subsequently rewrote
their constitutions to massively strengthen the powers of the
president. The fear of this slippery slope by those sharing power
under pluralistic political institutions is exactly what stopped Walpole
from fixing British courts in the 1720s, and it is what stopped the U.S.
Congress from backing Roosevelt’s court-packing plan. Roosevelt had
encountered the power of virtuous circles.

But this logic does not always play out, particularly in societies that
may have some inclusive features but that are broadly extractive. We
have already seen these dynamics in Rome and Venice. Another
illustration comes from comparing Roosevelt’s failed attempt to pack
the Court with similar efforts in Argentina, where crucially the same
struggles took place in the context of predominantly extractive
economic and political institutions.

The 1853 constitution of Argentina created a Supreme Court with
duties similar to those of the U.S. Supreme Court. An 1887 decision
allowed the Argentine court to assume the same role as that of the
U.S. Supreme Court in deciding whether specific laws were
constitutional. In theory, the Supreme Court could have developed as
one of the important elements of inclusive political institutions in
Argentina, but the rest of the political and economic system remained
highly extractive, and there was neither empowerment of broad
segments of society nor pluralism in Argentina. As in the United
States, the constitutional role of the Supreme Court would also be
challenged in Argentina. In 1946 Juan Domingo Peron was
democratically elected president of Argentina. Peron was a former
colonel and had first come to national prominence after a military

coup in 1943, which had appointed him minister of labor. In this
post, he built a political coalition with trade unions and the labor
movement, which would be crucial for his presidential bid.

Shortly after Peron’s victory, his supporters in the Chamber of
Deputies proposed the impeachment of four of the five members of
the Court. The charges leveled against the Court were several. One
involved unconstitutionally accepting the legality of two military
regimes in 1930 and 1943 — rather ironic, since Peron had played a
key role in the latter coup. The other focused on legislation that the
court had struck down, just as its U.S. counterpart had done. In
particular, just prior to Peron’s election as president, the Court had
issued a decision ruling that Peron’s new national labor relations
board was unconstitutional. Just as Roosevelt heavily criticized the
Supreme Court in his 1936 reelection campaign, Peron did the same
in his 1946 campaign. Nine months after initiating the impeachment
process, the Chamber of Deputies impeached three of the judges, the
fourth having already resigned. The Senate approved the motion.
Peron then appointed four new justices. The undermining of the
Court clearly had the effect of freeing Peron from political
constraints. He could now exercise unchecked power, in much the
same way the military regimes in Argentina did before and after his
presidency. His newly appointed judges, for example, ruled as
constitutional the conviction of Ricardo Balbin, the leader of the main
opposition party to Peron, the Radical Party, for disrespecting Peron.
Peron could effectively rule as a dictator.

Since Peron successfully packed the Court, it has become the norm
in Argentina for any new president to handpick his own Supreme
Court justices. So a political institution that might have exercised
some constraints on the power of the executive is gone. Peron’s
regime was removed from power by another coup in 1955, and was
followed by a long sequence of transitions between military and
civilian rule. Both new military and civilian regimes picked their own
justices. But picking Supreme Court justices in Argentina was not an
activity confined to transitions between military and civilian rule. In
1990 Argentina finally experienced a transition between

democratically elected governments — one democratic government
followed by another. Yet, by this time democratic governments did
not behave much differently from military ones when it came to the
Supreme Court. The incoming president was Carlos Saul Menem of
the Peronist Party. The sitting Supreme Court had been appointed
after the transition to democracy in 1983 by the Radical Party
president Raul Alfonsin. Since this was a democratic transition, there
should have been no reason for Menem to appoint his own court. But
in the run-up to the election, Menem had already shown his colors.
He continually, though not successfully, tried to encourage (or even
intimidate) members of the court to resign. He famously offered
Justice Carlos Fayt an ambassadorship. But he was rebuked, and Fayt
responded by sending him a copy of his book Law and Ethics, with the
note “Beware I wrote this” inscribed. Undeterred, within three
months of taking office, Menem sent a law to the Chamber of
Deputies proposing to expand the Court from five to nine members.
One argument was the same Roosevelt used in 1937: the court was
overworked. The law quickly passed the Senate and Chamber, and
this allowed Menem to name four new judges. He had his majority.

Menem’s victory against the Supreme Court set in motion the type
of slippery-slope dynamics we mentioned earlier. His next step was to
rewrite the constitution to remove the term limit so he could run for
president again. After being reelected, Menem moved to rewrite the
constitution again, but was stopped not by Argentina political
institutions but by factions within his own Peronist Party, who fought
back against his personal domination.

Since independence, Argentina has suffered from most of the
institutional problems that have plagued Latin America. It has been
trapped in a vicious, not a virtuous, circle. As a consequence, positive
developments, such as first steps toward the creation of an
independent Supreme Court, never gained a foothold. With pluralism,
no group wants or dares to overthrow the power of another, for fear
that its own power will be subsequently challenged. At the same time,
the broad distribution of power makes such an overthrow difficult. A
Supreme Court can have power if it receives significant support from

broad segments of society willing to push back attempts to vitiate the
Court’s independence. That has been the case in the United States, but
not Argentina. Legislators there were happy to undermine the Court
even if they anticipated that this could jeopardize their own position.
One reason is that with extractive institutions there is much to gain
from overthrowing the Supreme Court, and the potential benefits are
worth the risks.

Positive Feedback and Virtuous Circles

Inclusive economic and political institutions do not emerge by
themselves. They are often the outcome of significant conflict
between elites resisting economic growth and political change and
those wishing to limit the economic and political power of existing
elites. Inclusive institutions emerge during critical junctures, such as
during the Glorious Revolution in England or the foundation of the
Jamestown colony in North America, when a series of factors weaken
the hold of the elites in power, make their opponents stronger, and
create incentives for the formation of a pluralistic society. The
outcome of political conflict is never certain, and even if in hindsight
we see many historical events as inevitable, the path of history is
contingent. Nevertheless, once in place, inclusive economic and
political institutions tend to create a virtuous circle, a process of
positive feedback, making it more likely that these institutions will
persist and even expand.

The virtuous circle works through several mechanisms. First, the
logic of pluralistic political institutions makes usurpation of power by
a dictator, a faction within the government, or even a well-meaning
president much more difficult, as Franklin Roosevelt discovered when
he tried to remove the checks on his power imposed by the Supreme
Court, and as Sir Robert Walpole discovered when he attempted to
summarily implement the Black Act. In both cases, concentrating
power further in the hands of an individual or a narrow group would
have started undermining the foundations of pluralistic political
institutions, and the true measure of pluralism is precisely its ability

to resist such attempts. Pluralism also enshrines the notion of the rule
of law, the principle that laws should be applied equally to everybody
— something that is naturally impossible under an absolutist
monarchy. But the rule of law, in turn, implies that laws cannot
simply be used by one group to encroach upon the rights of another.
What’s more, the principle of the rule of law opens the door for
greater participation in the political process and greater inclusivity, as
it powerfully introduces the idea that people should be equal not only
before the law but also in the political system. This was one of the
principles that made it difficult for the British political system to
resist the forceful calls for greater democracy throughout the
nineteenth century, opening the way to the gradual extension of the
franchise to all adults.

Second, as we have seen several times before, inclusive political
institutions support and are supported by inclusive economic
institutions. This creates another mechanism of the virtuous circle.
Inclusive economic institutions remove the most egregious extractive
economic relations, such as slavery and serfdom, reduce the
importance of monopolies, and create a dynamic economy, all of
which reduces the economic benefits that one can secure, at least in
the short run, by usurping political power. Because economic
institutions had already become sufficiently inclusive in Britain by the
eighteenth century, the elite had less to gain by clinging to power
and, in fact, much to lose by using widespread repression against
those demanding greater democracy. This facet of the virtuous circle
made the gradual march of democracy in nineteenth-century Britain
both less threatening to the elite and more likely to succeed. This
contrasts with the situation in absolutist regimes such as the Austro-
Hungarian or Russian empires, where economic institutions were still
highly extractive and, in consequence, where calls for greater political
inclusion later in the nineteenth century would be met by repression
because the elite had too much to lose from sharing power.

Finally, inclusive political institutions allow a free media to
flourish, and a free media often provides information about and
mobilizes opposition to threats against inclusive institutions, as it did

during the last quarter of the nineteenth century and first quarter of
the twentieth century, when the increasing economic domination of
the Robber Barons was threatening the essence of inclusive economic
institutions in the United States.

Though the outcome of the ever-present conflicts continues to be
contingent, through these mechanisms the virtuous circle creates a
powerful tendency for inclusive institutions to persist, to resist
challenges, and to expand as they did in both Britain and the United
States. Unfortunately, as we will see in the next chapter, extractive
institutions create equally strong forces toward their persistence — the
process of the vicious circle.

12 .

THE VICIOUS CIRCLE

You Can’t Take the Train to Bo Anymore

All of the West African nation of Sierra Leone became a British colony

in 1896. The capital city, Freetown, had originally been founded in
the late eighteenth century as a home for repatriated and freed slaves.
But when Freetown became a British colony, the interior of Sierra
Leone was still made up of many small African kingdoms. Gradually,
in the second half of the nineteenth century, the British extended
their rule into the interior through a long series of treaties with
African rulers. On August 31, 1896, the British government declared
the colony a protectorate on the basis of these treaties. The British
identified important rulers and gave them a new title, paramount
chief. In eastern Sierra Leone, for example, in the modern diamond-
mining district of Kono, they encountered Suluku, a powerful warrior
king. King Suluku was made Paramount Chief Suluku, and the
chieftaincy of Sandor was created as an administrative unit in the
protectorate.

Though kings such as Suluku had signed treaties with a British
administrator, they had not understood that these treaties would be
interpreted as carte blanche to set up a colony. When the British tried
to levy a hut tax — a tax of five shillings to be raised from every house
— in January 1898, the chiefs rose up in a civil war that became
known as the Hut Tax Rebellion. It started in the north, but was
strongest and lasted longer in the south, particularly in Mendeland,
dominated by the Mende ethnic group. The Hut Tax Rebellion was
soon defeated, but it warned the British about the challenges of
controlling the Sierra Leonean hinterland. The British had already

started to build a railway from Freetown into the interior. Work
began in March 1896, and the line reached Songo Town in December
1898, in the midst of the Hut Tax Rebellion. British parliamentary
papers from 1904 recorded that:

In the case of the Sierra Leone Railways the Native
Insurrection that broke out in February 1898 had the
effect of completely stopping the works and disorganizing
the staff for some time. The rebels descended upon the
railway, with the result that the entire staff had to be
withdrawn to Freetown ... Rotifunk, now situated upon
the railways at 55 miles from Freetown, was at that time
completely in the hands of the rebels.

In fact, Rotifunk was not on the planned railway line in 1894. The
route was changed after the start of the rebellion, so that instead of
going to the northeast, it went south, via Rotifunk and on to Bo, into
Mendeland. The British wanted quick access to Mendeland, the heart
of the rebellion, and to other potentially disruptive parts of the
hinterland if other rebellions were to flare up.

When Sierra Leone became independent in 1961, the British
handed power to Sir Milton Margai and his Sierra Leone People’s
Party (SLPP), which attracted support primarily in the south,
particularly Mendeland, and the east. Sir Milton was followed as
prime minister by his brother, Sir Albert Margai, in 1964. In 1967 the
SLPP narrowly lost a hotly contested election to the opposition, the
All People’s Congress Party (APC), led by Siaka Stevens. Stevens was
a Limba, from the north, and the APC got most of their support from
northern ethnic groups, the Limba, the Temne, and the Loko.

Though the railway to the south was initially designed by the
British to rule Sierra Leone, by 1967 its role was economic,
transporting most of the country’s exports: coffee, cocoa, and
diamonds. The farmers who grew coffee and cocoa were Mende, and
the railway was Mendeland’s window to the world. Mendeland had
voted hugely for Albert Margai in the 1967 election. Stevens was

much more interested in holding on to power than promoting
Mendeland’s exports. His reasoning was simple: whatever was good
for the Mende was good for the SLPP, and bad for Stevens. So he
pulled up the railway line to Mendeland. He then went ahead and
sold off the track and rolling stock to make the change as irreversible
as possible. Now, as you drive out of Freetown to the east, you pass
the dilapidated railway stations of Hastings and Waterloo. There are
no more trains to Bo. Of course, Stevens’s drastic action fatally
damaged some of the most vibrant sectors of Sierra Leone’s economy.
But like many of Africa’s postindependence leaders, when the choice
was between consolidating power and encouraging economic growth,
Stevens chose consolidating his power, and he never looked back.
Today you can’t take the train to Bo anymore, because like Tsar
Nicholas I, who feared that the railways would bring revolution to
Russia, Stevens believed the railways would strengthen his opponents.
Like so many other rulers in control of extractive institutions, he was
afraid of challenges to his political power and was willing to sacrifice
economic growth to thwart those challenges.

Stevens’s strategy at first glance contrasts with that of the British.
But in fact, there was a significant amount of continuity between
British rule and Stevens’s regime that illustrates the logic of vicious
circles. Stevens ruled Sierra Leone by extracting resources from its
people using similar methods. He was still in power in 1985 not
because he had been popularly reelected, but because after 1967 he
set up a violent dictatorship, killing and harassing his political
opponents, particularly the members of the SLPP. He made himself
president in 1971, and after 1978, Sierra Leone had only one political
party, Stevens’s APC. Stevens thus successfully consolidated his
power, even if the cost was impoverishing much of the hinterland.

During the colonial period, the British used a system of indirect
rule to govern Sierra Leone, as they did with most of their African
colonies. At the base of this system were the paramount chiefs, who
collected taxes, distributed justice, and kept order. The British dealt
with the cocoa and coffee farmers not by isolating them, but by
forcing them to sell all their produce to a marketing board developed

by the colonial office purportedly to help the farmers. Prices for
agricultural commodities fluctuated wildly over time. Cocoa prices
might be high one year but low the next. The incomes of farmers
fluctuated in tandem. The justification for marketing boards was that
they, not the farmers, would absorb the price fluctuations. When
world prices were high, the board would pay the farmers in Sierra
Leone less than the world price, but when world prices were low,
they would do the opposite. It seemed a good idea in principle. The
reality was very different, however. The Sierra Leone Produce
Marketing Board was set up in 1949. Of course the board needed a
source of revenues to function. The natural way to attain these was by
paying farmers just a little less than they should have received either
in good or bad years. These funds could then be used for overhead
expenditures and administration. Soon the little less became a lot less.
The colonial state was using the marketing board as a way of heavily
taxing farmers.

Many expected the worst practices of colonial rule in sub-Saharan
Africa to stop after independence, and the use of marketing boards to
excessively tax farmers to come to an end. But neither happened. In
fact, the extraction of farmers using marketing boards got much
worse. By the mid-1960s, the farmers of palm kernels were getting 56
percent of the world price from the marketing board; cocoa farmers,
48 percent; and coffee farmers, 49 percent. By the time Stevens left
office in 1985, resigning to allow his handpicked successor, Joseph
Momoh, to become president, these numbers were 37, 19, and 27
percent, respectively. As pitiful as this might sound, it was better than
what the farmers were getting during Stevens’s reign, which had often
been as low as 10 percent — that is, 90 percent of the income of the
farmers was extracted by Stevens’s government, and not to provide
public services, such as roads or education, but to enrich himself and
his cronies and to buy political support.

As part of their indirect rule, the British had also stipulated that the
office of the paramount chief would be held for life. To be eligible to
be a chief, one had to be a member of a recognized “ruling house.”
The identity of the ruling houses in a chieftaincy developed over

time, but it was essentially based on the lineage of the kings in a
particular area and of the elite families who signed treaties with the
British in the late nineteenth century. Chiefs were elected, but not
democratically. A body called the Tribal Authority, whose members
were lesser village chiefs or were appointed by paramount chiefs,
village chiefs, or the British authorities, decided who would become
the paramount chief. One might have imagined that this colonial
institution would also have been abolished or at least reformed after
independence. But just like the marketing board, it was not, and
continued unchanged. Today paramount chiefs are still in charge of
collecting taxes. It is no longer a hut tax, but its close descendant, a
poll tax. In 2005 the Tribal Authority in Sandor elected a new
paramount chief. Only candidates from the Fasuluku ruling house,
which is the only ruling house, could stand. The victor was Sheku
Fasuluku, King Suluku’s great-great-grandson.

The behavior of the marketing boards and the traditional systems
of land ownership go a long way to explain why agricultural
productivity is so low in Sierra Leone and much of sub-Saharan
Africa. The political scientist Robert Bates set out in the 1980s to
understand why agriculture was so unproductive in Africa even
though according to textbook economics this ought to have been the
most dynamic economic sector. He realized that this had nothing to
do with geography or the sorts of factors discussed in chapter 2 that
have been claimed to make agricultural productivity intrinsically low.
Rather, it was simply because the pricing policies of the marketing
boards removed any incentives for the farmers to invest, use
fertilizers, or preserve the soil.

The reason that the policies of the marketing boards were so
unfavorable to rural interests was that these interests had no political
power. These pricing policies interacted with other fundamental
factors making tenure insecure, further undermining investment
incentives. In Sierra Leone, paramount chiefs not only provide law
and order and judicial services, and raise taxes, but they are also the
“custodians of the land.” Though families, clans, and dynasties have
user rights and traditional rights to land; at the end of the day chiefs

have the last say on who farms where. Your property rights to land
are only secure if you are connected to the chief, perhaps from the
same ruling family. Land cannot be bought or sold or used as
collateral for a loan, and if you are born outside a chieftaincy, you
cannot plant any perennial crop such as coffee, cocoa, or palm for
fear that this will allow you to establish “de facto” property rights.

The contrast between the extractive institutions developed by the
British in Sierra Leone and the inclusive institutions that developed in
other colonies, such as Australia, is illustrated by the way mineral
resources were managed. Diamonds were discovered in Kono in
eastern Sierra Leone in January 1930. The diamonds were alluvial,
that is, not in deep mines. So the primary method of mining them was
by panning in rivers. Some social scientists call these “democratic
diamonds,” because they allow many people to become involved in
mining, creating a potentially inclusive opportunity. Not so in Sierra
Leone. Happily ignoring the intrinsically democratic nature of
panning for diamonds, the British government set up a monopoly for
the entire protectorate, called it the Sierra Leone Selection Trust, and
granted it to De Beers, the giant South African diamond mining
company. In 1936 De Beers was also given the right to create the
Diamond Protection Force, a private army that would become larger
than that of the colonial government in Sierra Leone. Even so, the
widespread availability of the alluvial diamonds made the situation
difficult to police. By the 1950s, the Diamond Protection Force was
overwhelmed by thousands of illegal diamond miners, a massive
source of conflict and chaos. In 1955 the British government opened
up some of the diamond fields to licensed diggers outside the Sierra
Leone Selection Trust, though the company still kept the richest areas
in Yengema and Koidu and Tongo Fields. Things only got worse after
independence. In 1970 Siaka Stevens effectively nationalized the
Sierra Leone Selection Trust, creating the National Diamond Mining
Company (Sierra Leone) Limited, in which the government,
effectively meaning Stevens, had a 51 percent stake. This was the
opening phase of Stevens’s plan to take over diamond mining in the
country.

In nineteenth-century Australia it was gold, discovered in 1851 in
New South Wales and the newly created state of Victoria, not
diamonds, that attracted everyone’s attention. Like diamonds in
Sierra Leone, the gold was alluvial, and a decision had to be made
about how to exploit it. Some, such as James Macarthur, son of John
Macarthur, the prominent leader of the Squatters we discussed earlier
(this page-this page), proposed that fences be placed around the
mining areas and the monopoly rights auctioned off. They wanted an
Australian version of the Sierra Leone Selection Trust. Yet many in
Australia wanted free access to the gold mining areas. The inclusive
model won, and instead of setting up a monopoly, Australian
authorities allowed anyone who paid an annual mining license fee to
search and dig for gold. Soon the diggers, as these adventurers came
to be known, were a powerful force in Australian politics, particularly
in Victoria. They played an important role in pushing forward the
agenda of universal suffrage and the secret ballot.

We have already seen two pernicious effects of European expansion
and colonial rule in Africa: the introduction of the transatlantic slave
trade, which encouraged the development of African political and
economic institutions in an extractive direction, and the use of
colonial legislation and institutions to eliminate the development of
African commercial agriculture that might have competed with
Europeans. Slavery was certainly a force in Sierra Leone. At the time
of colonization there was no strong centralized state in the interior,
just many small, mutually antagonistic kingdoms continually raiding
one another and capturing one another’s men and women. Slavery
was endemic, with possibly 50 percent of the population working as
slaves. The disease environment meant that large-scale white
settlement was not possible in Sierra Leone, as it was in South Africa.
Hence there were no whites competing with the Africans. Moreover,
the lack of a mining economy on the scale of Johannesburg meant
that, in addition to the lack of demand for African labor from white
farms, there was no incentive to create the extractive labor market
institutions so characteristic of Apartheid South Africa.

But other mechanisms were also in play. Sierra Leone’s cocoa and

coffee farmers did not compete with whites, though their incomes
were still expropriated via a government monopoly, the marketing
board. Sierra Leone also suffered from indirect rule. In many parts of
Africa where the British authorities wished to use indirect rule, they
found peoples who did not have a system of centralized authority
who could be taken over. For example, in eastern Nigeria the Igbo
peoples had no chiefs when the British encountered them in the
nineteenth century. The British then created chiefs, the warrant
chiefs. In Sierra Leone, the British would base indirect rule on existing
indigenous institutions and systems of authority.

Nevertheless, regardless of the historical basis for the individuals
recognized as paramount chiefs in 1896, indirect rule, and the powers
that it invested in paramount chiefs, completely changed the existing
politics of Sierra Leone. For one, it introduced a system of social
stratification — the ruling houses — where none had existed previously.
A hereditary aristocracy replaced a situation that had been much
more fluid and where chiefs had required popular support. Instead
what emerged was a rigid system with chiefs holding office for life,
beholden to their patrons in Freetown or Britain, and far less
accountable to the people they ruled. The British were happy to
subvert the institutions in other ways, too, for example, by replacing
legitimate chiefs with people who were more cooperative. Indeed, the
Margai family, which supplied the first two prime ministers of
independent Sierra Leone, came to power in the Lower Banta
chieftaincy by siding with the British in the Hut Tax Rebellion against
the reigning chief, Nyama. Nyama was deposed, and the Margais
became chiefs and held the position until 2010.

What is remarkable is the extent of continuity between colonial and
independent Sierra Leone. The British created the marketing boards
and used them to tax farmers. Postcolonial governments did the same
extracting at even higher rates. The British created the system of
indirect rule through paramount chiefs. Governments that followed
independence didn’t reject this colonial institution; rather, they used
it to govern the countryside as well. The British set up a diamond
monopoly and tried to keep out African miners. Postindependence

governments did the same. It is true that the British thought that
building railways was a good way to rule Mendeland, while Siaka
Stevens thought the opposite. The British could trust their army and
knew it could be sent to Mendeland if a rebellion arose. Stevens, on
the other hand, could not do so. As in many other African nations, a
strong army would have become a threat to Stevens’s rule. It was for
this reason that he emasculated the army, cutting it down and
privatizing violence through specially created paramilitary units loyal
only to him, and in the process, he accelerated the decline of the little
state authority that existed in Sierra Leone. Instead of the army, first
came the Internal Security Unit, the ISU, which Sierra Leone’s long-
suffering people knew as “I Shoot U.” Then came the Special Security
Division, the SSD, which the people knew as “Siaka Stevens’s Dogs.”
In the end, the absence of an army supporting the regime would also
be its undoing. It was a group of only thirty soldiers, led by Captain
Valentine Strasser, that pitched the APC regime from power on April
29 , 1992 .

Sierra Leone’s development, or lack thereof, could be best
understood as the outcome of the vicious circle. British colonial
authorities built extractive institutions in the first place, and the
postindependence African politicians were only too happy to take up
the baton for themselves. The pattern was eerily similar all over sub-
Saharan Africa. There were similar hopes for postindependence
Ghana, Kenya, Zambia, and many other African countries. Yet in all
these cases, extractive institutions were re-created in a pattern
predicted by the vicious circle — only they became more vicious as
time went by. In all these countries, for example, the British creation
of marketing boards and indirect rule were sustained.

There are natural reasons for this vicious circle. Extractive political
institutions lead to extractive economic institutions, which enrich a
few at the expense of many. Those who benefit from extractive
institutions thus have the resources to build their (private) armies and
mercenaries, to buy their judges, and to rig their elections in order to
remain in power. They also have every interest in defending the
system. Therefore, extractive economic institutions create the

platform for extractive political institutions to persist. Power is
valuable in regimes with extractive political institutions, because
power is unchecked and brings economic riches.

Extractive political institutions also provide no checks against
abuses of power. Whether power corrupts is debatable, but Lord
Acton was certainly right when he argued that absolute power
corrupts absolutely. We saw in the previous chapter that even when
Franklin Roosevelt wished to use his presidential powers in a way
that he thought would be beneficial for the society, unencumbered by
constraints imposed by the Supreme Court, the inclusive U.S. political
institutions prevented him from setting aside the constraints on his
power. Under extractive political institutions, there is little check
against the exercise of power, however distorted and sociopathic it
may become. In 1980 Sam Bangura, then the governor of the central
bank in Sierra Leone, criticized Siaka Stevens’s policies for being
profligate. He was soon murdered and thrown from the top floor of
the central bank building onto the aptly named Siaka Stevens Street.
Extractive political institutions thus also tend to create a vicious circle
because they provide no line of defense against those who want to
further usurp and misuse the powers of the state.

Yet another mechanism for the vicious circle is that extractive
institutions, by creating unconstrained power and great income
inequality, increase the potential stakes of the political game. Because
whoever controls the state becomes the beneficiary of this excessive
power and the wealth that it generates, extractive institutions create
incentives for infighting in order to control power and its benefits, a
dynamic that we saw played out in Maya city-states and in Ancient
Rome. In this light, it is no surprise that the extractive institutions
that many African countries inherited from the colonial powers sowed
the seeds of power struggles and civil wars. These struggles would be
very different conflicts from the English Civil War and the Glorious
Revolution. They would not be fought to change political institutions,
introduce constraints on the exercise of power, or create pluralism,
but to capture power and enrich one group at the expense of the rest.
In Angola, Burundi, Chad, Cote d’Ivoire, the Democratic Republic of

Congo, Ethiopia, Liberia, Mozambique, Nigeria, Republic of Congo
Brazzaville, Rwanda, Somalia, Sudan, and Uganda, and of course in
Sierra Leone, as we will see in more detail in the next chapter, these
conflicts would turn into bloody civil wars and would create
economic ruin and unparalleled human suffering — as well as cause
state failure.

From Encomienda to Land Grab

On January 14, 1993, Ramiro De Leon Carpio was sworn in as the
president of Guatemala. He named Richard Aitkenhead Castillo as his
minister of finance, and Ricardo Castillo Sinibaldi as his minister of
development. These three men all had something in common: all
were direct descendants of Spanish conquistadors who had come to
Guatemala in the early sixteenth century. De Leon’s illustrious
ancestor was Juan De Leon Cardona, while the Castillos were related
to Bernal Diaz del Castillo, a man who wrote one of the most famous
eyewitness accounts of the conquest of Mexico. In reward for his
service to Hernan Cortes, Diaz del Castillo was appointed governor of
Santiago de los Caballeros, which is today the city of Antigua in
Guatemala. Both Castillo and De Leon founded dynasties along with
other conquistadors, such as Pedro de Alvarado. The Guatemalan
sociologist Marta Casaus Arzu identified a core group of twenty-two
families in Guatemala that had ties through marriage to another
twenty-six families just outside the core. Her genealogical and
political study suggested that these families have controlled economic
and political power in Guatemala since 1531. An even broader
definition of which families were part of this elite suggested that they
accounted for just over 1 percent of the population in the 1990s.

In Sierra Leone and in much of sub-Saharan Africa, the vicious
circle took the form of the extractive institutions set up by colonial
powers being taken over by postindependence leaders. In Guatemala,
as in much of Central America, we see a simpler, more naked form of
the vicious circle: those who have economic and political power
structure institutions to ensure the continuity of their power, and

succeed in doing so. This type of vicious circle leads to the persistence
of extractive institutions and the persistence of the same elites in
power together with the persistence of underdevelopment.

At the time of the conquest, Guatemala was densely settled,
probably with a population of around two million Mayas. Disease and
exploitation took a heavy toll as everywhere else in the Americas. It
was not until the 1920s that its total population returned to this level.
As elsewhere in the Spanish Empire, the indigenous people were
allocated to conquistadors in grants of encomienda. As we saw in the
context of the colonization of Mexico and Peru, the encomienda was a
system of forced labor, which subsequently gave way to other similar
coercive institutions, particularly to the repartimiento, also called the
mandamiento in Guatemala. The elite, made up of the descendants of
the conquistadors and some indigenous elements, not only benefited
from the various forced labor systems but also controlled and
monopolized trade through a merchant guild called the Consulado de
Comercio. Most of the population in Guatemala was high in the
mountains and far from the coast. The high transportation costs
reduced the extent of the export economy, and initially land was not
very valuable. Much of it was still in the hands of indigenous peoples,
who had large communal landholdings called ejidos. The remainder
was largely unoccupied and notionally owned by the government.
There was more money in controlling and taxing trade, such as it was,
than in controlling the land.

Just as in Mexico, the Guatemalan elite viewed the Cadiz
Constitution (this page-this page) with hostility, which encouraged
them to declare independence just as the Mexican elites did.
Following a brief union with Mexico and the Central American
Federation, the colonial elite ruled Guatemala under the dictatorship
of Rafael Carrera from 1839 to 1871. During this period the
descendants of the conquistadors and the indigenous elite maintained
the extractive economic institutions of the colonial era largely
unchanged. Even the organization of the Consulado did not alter with
independence. Though this was a royal institution, it happily
continued under a republican government.

Independence then was simply a coup by the preexisting local elite,
just as in Mexico; they carried on as usual with the extractive
economic institutions from which they had benefited so much.
Ironically enough, during this period the Consulado remained in
charge of the economic development of the country. But as had been
the case pre-independence, the Consulado had its own interests at
heart, not those of the country. Part of its responsibility was for the
development of infrastructure, such as ports and roads, but as in
Austria-Hungary, Russia, and Sierra Leone, this often threatened
creative destruction and could have destabilized the system.
Therefore, the development of infrastructure, rather than being
implemented, was often resisted. For example, the development of a
port on the Suchitepequez coast, bordering the Pacific Ocean, was
one of the proposed projects. At the time the only proper ports were
on the Caribbean coast, and these were controlled by the Consulado.
The Consulado did nothing on the Pacific side because a port in that
region would have provided a much easier outlet for goods from the
highland towns of Mazatenango and Quezaltenango, and access to a
different market for these goods would have undermined the
Consulado’s monopoly on foreign trade. The same logic applied to
roads, where, again, the Consulado had the responsibility for the
entire country. Predictably it also refused to build roads that would
have strengthened competing groups or would have potentially
undone its monopoly. Pressure to do so again came from western
Guatemala and Quezaltenango, in the Los Altos region. But if the road
between Los Altos and the Suchitepequez coast had been improved,
this could have created a merchant class, which would have been a
competitor to the Consulado merchants in the capital. The road did
not get improved.

As a result of this elite dominance, Guatemala was caught in a time
warp in the middle of the nineteenth century, as the rest of the world
was changing rapidly. But these changes would ultimately affect
Guatemala. Transportation costs were falling due to technological
innovations such as the steam train, the railways, and new, much
faster types of ships. Moreover, the rising incomes of people in

Western Europe and North America were creating a mass demand for
many products that a country such as Guatemala could potentially
produce.

Early in the century, some indigo and then cochineal, both natural
dyes, had been produced for export, but the more profitable
opportunity would become coffee production. Guatemala had a lot of
land suitable for coffee, and cultivation began to spread — without any
assistance from the Consulado. As the world price of coffee rose and
international trade expanded, there were huge profits to be made, and
the Guatemalan elite became interested in coffee. In 1871 the long-
lasting regime of the dictator Carrera was finally overthrown by a
group of people calling themselves Liberals, after the worldwide
movement of that name. What liberalism means has changed over
time. But in the nineteenth century in the United States and Europe, it
was similar to what is today called libertarianism, and it stood for
freedom of individuals, limited government, and free trade. Things
worked a little differently in Guatemala. Led initially by Miguel
Garda Granados, and after 1873 by Justo Rufino Barrios, the
Guatemalan Liberals were, for the most part, not new men with
liberal ideals. By and large, the same families remained in charge.
They maintained extractive political institutions and implemented a
huge reorganization of the economy to exploit coffee. They did
abolish the Consulado in 1871, but economic circumstances had
changed. The focus of extractive economic institutions would now be
the production and export of coffee.

Coffee production needed land and labor. To create land for coffee
farms, the Liberals pushed through land privatization, in fact really a
land grab in which they would be able to capture land previously
held communally or by the government. Though their attempt was
bitterly contested, given the highly extractive political institutions
and the concentration of political power in Guatemala, the elite were
ultimately victorious. Between 1871 and 1883 nearly one million
acres of land, mostly indigenous communal land and frontier lands,
passed into the hands of the elite, and it was only then that coffee
developed rapidly. The aim was the formation of large estates. The

privatized lands were auctioned off typically to members of the
traditional elite or those connected with them. The coercive power of
the Liberal state was then used to help large landowners gain access
to labor by adapting and intensifying various systems of forced labor.
In November 1876, President Barrios wrote to all the governors of
Guatemala noting that

because the country has extensive areas of land that it
needs to exploit by cultivation using the multitude of
workers who today remain outside the movement of
development of the nation’s productive elements, you are
to give all help to export agriculture:

1. From the Indian towns of your jurisdiction provide to
the owners of fincas [farms] of that department who ask
for labor the number of workers they need, be it fifty or
one hundred.

The repartimiento, the forced labor draft, had never been abolished
after independence, but now it was increased in scope and duration.
It was institutionalized in 1877 by Decree 177, which specified that
employers could request and receive from the government up to sixty
workers for fifteen days of work if the property was in the same
department, and for thirty days if it was outside it. The request could
be renewed if the employer so desired. These workers could be
forcibly recruited unless they could demonstrate from their personal
workbook that such service had recently been performed
satisfactorily. All rural workers were also forced to carry a workbook,
called a libreta, which included details of whom they were working
for and a record of any debts. Many rural workers were indebted to
their employers, and an indebted worker could not leave his current
employer without permission. Decree 177 further stipulated that the
only way to avoid being drafted into the repartimiento was to show
you were currently in debt to an employer. Workers were trapped. In
addition to these laws, numerous vagrancy laws were passed so that
anyone who could not prove he had a job would be immediately

recruited for the repartimiento or other types of forced labor on the
roads, or would be forced to accept employment on a farm. As in
nineteenth- and twentieth-century South Africa, land policies after
1871 were also designed to undermine the subsistence economy of
the indigenous peoples, to force them to work for low wages. The
repartimiento lasted until the 1920s; the libreta system and the full
gamut of vagrancy laws were in effect until 1945, when Guatemala
experienced its first brief flowering of democracy.

Just as before 1871, the Guatemalan elite ruled via military
strongmen. They continued to do so after the coffee boom took off.
Jorge Ubico, president between 1931 and 1944, ruled longest. Ubico
won the presidential election in 1931 unopposed, since nobody was
foolish enough to run against him. Like the Consulado, he didn’t
approve of doing things that would have induced creative destruction
and threatened both his political power and his and the elite’s profits.
He therefore opposed industry for the same reason that Francis I in
Austria-Hungary and Nicholas I in Russia did: industrial workers
would have caused trouble. In a legislation unparalleled in its
paranoid repressiveness, Ubico banned the use of words such as
obreros (workers), sindicatos (labor unions), and huelgas (strikes). You
could be jailed for using any one of them. Even though Ubico was
powerful, the elite pulled the strings. Opposition to his regime
mounted in 1944, headed by disaffected university students who
began to organize demonstrations. Popular discontent increased, and
on June 24, 311 people, many of them from the elite, signed the
Memorial de los 311, an open letter denouncing the regime. Ubico
resigned on July 1. Though he was followed by a democratic regime
in 1945, this was overthrown by a coup in 1954, leading to a
murderous civil war. Guatemala democratized again after only 1986.

The Spanish conquistadors had no compunction about setting up an
extractive political and economic system. That was why they had
come all the way to the New World. But most of the institutions they
set up were meant to be temporary. The encomienda, for example, was
a temporary grant of rights over labor. They did not have a fully
worked-out plan of how they would set up a system that would

persist for another four hundred years. In fact, the institutions they
set up changed significantly along the way, but one thing did not: the
extractive nature of the institutions, the result of the vicious circle.
The form of extraction changed, but neither the extractive nature of
the institutions nor the identity of the elite did. In Guatemala the
encomienda, the repartimiento, and the monopolization of trade gave
way to the libreta and the land grab. But the majority of the
indigenous Maya continued to work as low-wage laborers with little
education, no rights, and no public services.

In Guatemala, as in much of Central America, in a typical pattern of
the vicious circle, extractive political institutions supported extractive
economic institutions, which in turn provided the basis for extractive
political institutions and the continuation of the power of the same
elite.

From Slavery to Jim Crow

In Guatemala, extractive institutions persisted from colonial to
modern times with the same elite firmly in control. Any change in
institutions resulted from adaptations to changing environments, as
was the case with the land grab by the elite motivated by the coffee
boom. The institutions in the U.S. South were similarly extractive
until the Civil War. Economics and politics were dominated by the
southern elite, plantation owners with large land and slave holdings.
Slaves had neither political nor economic rights; indeed, they had few
rights of any kind.

The South’s extractive economic and political institutions made it
considerably poorer than the North by the middle of the nineteenth
century. The South lacked industry and made relatively little
investment in infrastructure. In 1860 its total manufacturing output
was less than that of Pennsylvania, New York, or Massachusetts. Only
9 percent of the southern population lived in urban areas, compared
with 35 percent in the Northeast. The density of railroads (i.e., miles
of track divided by land area) was three times higher in the North
than in southern states. The ratio of canal mileage was similar.

Map 18 (this page) shows the extent of slavery by plotting the
percentage of the population that were slaves across U.S. counties in
1840. It is apparent that slavery was dominant in the South with
some counties, for example, along the Mississippi River having as
much as 95 percent of the population slaves. Map 19 (this page) then
shows one of the consequences of this, the proportion of the labor
force working in manufacturing in 1880. Though this was not high
anywhere by twentieth-century standards, there are marked
differences between the North and the South. In much of the
Northeast, more than 10 percent of the labor force worked in
manufacturing. In contrast in much of the South, particularly the
areas with heavy concentrations of slaves, the proportion was
basically zero.

Percentage in slaver)’, 1840
0 %

0 . 01 %- 20 %

■■ 20% -40%

40% -60%

H 60% -95%

No data

Map IK: Slavery across U.S. counties in 1840

The South was not even innovative in the sectors in which it
specialized: from 1837 to 1859, the numbers of patents issued per
year for innovations related to corn and wheat were on average
twelve and ten, respectively; there was just one per year for the most
important crop of the South, cotton. There was no indication that
industrialization and economic growth would commence anytime
soon. But defeat in the Civil War was followed by fundamental
economic and political reform at bayonet point. Slavery was
abolished, and black men were allowed to vote.

These major changes should have opened the way for a radical
transformation of southern extractive institutions into inclusive ones,

and launched the South onto a path to economic prosperity. But in
yet another manifestation of the vicious circle, nothing of the sort
happened. A continuation of extractive institutions, this time of the
Jim Crow kind rather than of slavery, emerged in the South. The
phrase Jim Crow, which supposedly originated from “Jump Jim
Crow,” an early-nineteenth-century satire of black people performed
by white performers in “blackface,” came to refer to the whole gamut
of segregationist legislation that was enacted in the South after 1865.
These persisted for almost another century, until yet another major
upheaval, the civil rights movement. In the meantime, blacks
continued to be excluded from power and repressed. Plantation-type
agriculture based on low-wage, poorly educated labor persisted, and
southern incomes fell further relative to the U.S. average. The vicious
circle of extractive institutions was stronger than many had expected
at the time.

Percentage working in
manufacturing, 1880

_ <)%-0..\S%

■I l%-2.5%
2.5%-10%
> 10 %

No data

Map 19: Manufacturing employment across I S. counties in 1X80

The reason that the economic and political trajectory of the South
never changed, even though slavery was abolished and black men
were given the right to vote, was because blacks’ political power and
economic independence were tenuous. The southern planters lost the
war, but would win the peace. They were still organized and they still
owned the land. During the war, freed slaves had been offered the
promise of forty acres and a mule when slavery was abolished, and
some even got it during the famous campaigns of General William T.
Sherman. But in 1865, President Andrew Johnson revoked Sherman’s
orders, and the hoped-for land redistribution never took place. In a
debate on this issue in Congress, Congressman George Washington

Julian presciently noted, “Of what avail would be an act of congress
totally abolishing slavery ... if the old agricultural basis of aristocratic
power shall remain?” This was the beginning of the “redemption” of
the old South and the persistence of the old southern landed elite.

The sociologist Jonathan Wiener studied the persistence of the
planter elite in five counties of the Black Belt, prime cotton country,
of southern Alabama. Tracking families from the U.S. census and
considering those with at least $10,000 of real estate, he found that of
the 236 members of the planter elite in 1850, 101 maintained their
position in 1870. Interestingly, this rate of persistence was very
similar to that experienced in the pre-Civil War period; of the 236
wealthiest planter families of 1850, only 110 remained so a decade
later. Nevertheless, of the 25 planters with the largest landholdings in
1870, 18 (72 percent) had been in the elite families in 1860; 16 had
been in the 1850 elite group. While more than 600,000 were killed in
the Civil War, the planter elites suffered few casualties. The law,
designed by the planters and for the planters, exempted one
slaveholder from military service for every twenty slaves held. As
hundreds of thousands of men died to preserve the southern
plantation economy, many big slaveholders and their sons sat out the
war on their porches and thus were able to ensure the persistence of
the plantation economy.

After the end of the war, the elite planters controlling the land were
able to reexert their control over the labor force. Though the
economic institution of slavery was abolished, the evidence shows a
clear line of persistence in the economic system of the South based on
plantation-type agriculture with cheap labor. This economic system
was maintained through a variety of channels, including both control
of local politics and exercise of violence. As a consequence, in the
words of the African American scholar W.E.B. Du Bois, the South
became “simply an armed camp for intimidating black folk.”

In 1865 the state legislature of Alabama passed the Black Code, an
important landmark toward the repression of black labor. Similar to
Decree 177 in Guatemala, the Black Code of Alabama consisted of a
vagrancy law and a law against the “enticement” of laborers. It was

designed to impede labor mobility and reduce competition in the
labor market, and it ensured that southern planters would still have a
reliable low-cost labor pool.

Following the Civil War, the period called Reconstruction lasted
from 1865 until 1877. Northern politicians, with the help of the
Union Army, engineered some social changes in the South. But a
systematic backlash from the southern elite in the guise of support for
the so-called Redeemers, seeking the South’s redemption, re-created
the old system. In the 1877 presidential election, Rutherford Hayes
needed southern support in the electoral college. This college, still
used today, was at the heart of the indirect election for president
created by the U.S. Constitution. Citizens’ votes do not directly elect
the president but instead elect electors who then choose the president
in the electoral college. In exchange for their support in the electoral
college, the southerners demanded that Union soldiers be withdrawn
from the South and the region left to its own devices. Hayes agreed.
With southern support, Hayes became president and pulled out the
troops. The period after 1877 then marked the real reemergence of
the pre-Civil War planter elite. The redemption of the South involved
the introduction of new poll taxes and literacy tests for voting, which
systematically disenfranchised blacks, and often also the poor white
population. These attempts succeeded and created a one-party regime
under the Democratic Party, with much of the political power vested
in the hands of the planter elite.

The Jim Crow laws created separate, and predictably inferior,
schools. Alabama, for example, rewrote its constitution in 1901 to
achieve this. Shockingly, even today Section 256 of Alabama’s
constitution, though no longer enforced, still states:

Duty of legislature to establish and maintain public school
system; apportionment of public school fund; separate
schools for white and colored children.

The legislature shall establish, organize, and maintain a
liberal system of public schools throughout the state for
the benefit of the children thereof between the ages of

seven and twenty-one years. The public school fund shall
be apportioned to the several counties in proportion to the
number of school children of school age therein, and shall
be so apportioned to the schools in the districts or
townships in the counties as to provide, as nearly as
practicable, school terms of equal duration in such school
districts or townships. Separate schools shall be provided
for white and colored children, and no child of either race
shall be permitted to attend a school of the other race.

An amendment to strike Section 256 from the constitution was
narrowly defeated in the state legislature in 2004.

Disenfranchisement, the vagrancy laws such as the Black Code of
Alabama, various Jim Crow laws, and the actions of the Ku Klux Klan,
often financed and supported by the elite, turned the post-Civil War
South into an effective apartheid society, where blacks and whites
lived different lives. As in South Africa, these laws and practices were
aimed at controlling the black population and its labor.

Southern politicians in Washington also worked to make sure that
the extractive institutions of the South could persist. For instance,
they ensured that no federal projects or public works that would have
jeopardized southern elite control over the black workforce ever got
approved. Consequently, the South entered the twentieth century as a
largely rural society with low levels of education and backward
technology, still employing hand labor and mule power virtually
unassisted by mechanical implements. Though the proportion of
people in urban areas increased, it was far less than in the North. In
1900, for example, 13.5 percent of the population of the South was
urbanized, as compared with 60 percent in the Northeast.

All in all, the extractive institutions in the southern United States,
based on the power of the landed elite, plantation agriculture, and
low-wage, low-education labor, persisted well into the twentieth
century. These institutions started to crumble only after the Second
World War and then truly after the civil rights movement destroyed
the political basis of the system. And it was only after the demise of

these institutions in the 1950s and ’60s that the South began its
process of rapid convergence to the North.

The U.S. South shows another, more resilient side of the vicious
circle: as in Guatemala, the southern planter elite remained in power
and structured economic and political institutions in order to ensure
the continuity of its power. But differently from Guatemala, it was
faced with significant challenges after its defeat in the Civil War,
which abolished slavery and reversed the total, constitutional
exclusion of blacks from political participation. But there is more than
one way of skinning a cat: as long as the planter elite was in control
of its huge landholdings and remained organized, it could structure a
new set of institutions, Jim Crow instead of slavery, to achieve the
same objective. The vicious circle turned out to be stronger than
many, including Abraham Lincoln, had thought. The vicious circle is
based on extractive political institutions creating extractive economic
institutions, which in turn support the extractive political institutions,
because economic wealth and power buy political power. When forty
acres and a mule was off the table, the southern planter elite’s
economic power remained untarnished. And, unsurprisingly and
unfortunately, the implications for the black population of the South,
and the South’s economic development, were the same.

The Iron Law of Oligarchy

The Solomonic dynasty in Ethiopia lasted until it was overthrown by
a military coup in 1974. The coup was led by the Derg, a group of
Marxist army officers. The regime that the Derg pitched from power
looked like it was frozen in some earlier century, a historical
anachronism. The emperor Haile Selassie would start his day by
arriving in the courtyard at the Grand Palace, which had been built
by Emperor Menelik II in the late nineteenth century. Outside the
palace would be a crowd of dignitaries anticipating his arrival,
bowing and desperately trying to get his attention. The emperor
would hold court in the Audience Hall, sitting on the imperial throne.
(Selassie was a small man; so that his legs were not left swinging in

the air, it was the job of a special pillow bearer to accompany him
wherever he went to make sure there was a suitable pillow to put
under his feet. The bearer kept a stock of fifty-two pillows to cope
with any situation.) Selassie presided over an extreme set of
extractive institutions and ran the country as his own private
property, handing out favors and patronage and ruthlessly punishing
lack of loyalty. There was no economic development to speak of in
Ethiopia under the Solomonic dynasty.

The Derg initially formed out of 108 representatives of different
military units from all over the country. The representative of the
Third Division in Harar province was a major named Mengistu Haile
Mariam. Though in their initial declaration of July 4, 1974, the Derg
officers declared their loyalty to the emperor, they soon started to
arrest members of the government, testing how much opposition it
would create. As they became more confident that the support for
Selassie’s regime was hollow, they moved on the emperor himself,
arresting him on September 12. Then the executions began. Many
politicians at the core of the old regime were swiftly killed. By
December, the Derg had declared that Ethiopia was a socialist state.
Selassie died, probably murdered, on August 27, 1975. In 1975 the
Derg started nationalizing property, including all urban and rural
land and most kinds of private property. The increasingly
authoritarian behavior of the regime sparked opposition around the
country. Large parts of Ethiopia were put together during the
European colonial expansion in the late nineteenth and early
twentieth centuries by the policies of Emperor Menelik II, the victor
of the battle of Adowa, which we encountered before (this page).
These included Eritrea and Tigray in the north and the Ogaden in the
east. Independence movements in response to the Derg’s ruthless
regime emerged in Eritrea and Tigray, while the Somali army invaded
the Somali-speaking Ogaden. The Derg itself started to disintegrate
and split into factions. Major Mengistu turned out to be the most
ruthless and clever of them. By mid-1977 he had eliminated his major
opponents and effectively taken charge of the regime, which was
saved from collapse only by a huge influx of weapons and troops from

the Soviet Union and Cuba later in November of that year.

In 1978 the regime organized a national celebration marking the
fourth anniversary of the overthrow of Haile Selassie. By this time
Mengistu was the unchallenged leader of the Derg. As his residence,
the place from where he would rule Ethiopia, he had chosen Selassie’s
Grand Palace, left unoccupied since the monarchy was abolished. At
the celebration, he sat on a gilded armchair, just like the emperors of
old, watching the parade. Official functions were now held once again
at the Grand Palace, with Mengistu sitting on Haile Selassie’s old
throne. Mengistu started to compare himself to Emperor Tewodros,
who had refounded the Solomonic Dynasty in the mid-nineteenth
century after a period of decline.

One of his ministers, Dawit Wolde Giorgis, recalled in his memoir:

At the beginning of the Revolution all of us had utterly
rejected anything to do with the past. We would no longer
drive cars, or wear suits; neckties were considered
criminal. Anything that made you look well-off or
bourgeois, anything that smacked of affluence or
sophistication, was scorned as part of the old order. Then,
around 1978, all that began to change. Gradually
materialism became accepted, then required. Designer
clothes from the best European tailors were the uniform of
all senior government officials and members of the
Military Council. We had the best of everything: the best
homes, the best cars, the best whiskey, champagne, food.

It was a complete reversal of the ideals of the Revolution.

Giorgis also vividly recorded how Mengistu changed once he
became sole ruler:

The real Mengistu emerged: vengeful, cruel and
authoritarian ... Many of us who used to talk to him with
hands in our pockets, as if he were one of us, found
ourselves standing stiffly to attention, cautiously respectful
in his presence. In addressing him we had always used the

familiar form of “you,” ante; now we found ourselves
switching to the more formal “you,” ersiwo. He moved into
a bigger, more lavish office in the Palace of Menelik ... He
began using the Emperor’s cars ... We were supposed to
have a revolution of equality; now he had become the new
Emperor.

The pattern of vicious circle depicted by the transition between
Haile Selassie and Mengistu, or between the British colonial
governors of Sierra Leone and Siaka Stevens, is so extreme and at
some level so strange that it deserves a special name. As we already
mentioned in chapter 4, the German sociologist Robert Michels called
it the iron law of oligarchy. The internal logic of oligarchies, and in
fact of all hierarchical organizations, is that, argued Michels, they will
reproduce themselves not only when the same group is in power, but
even when an entirely new group takes control. What Michels did not
anticipate perhaps was an echo of Karl Marx’s remark that history
repeats itself — the first time as tragedy, the second time as farce.

It is not only that many of the postindependence leaders of Africa
moved into the same residences, made use of the same patronage
networks, and employed the same ways of manipulating markets and
extracting resources as had the colonial regimes and the emperors
they replaced; but they also made things worse. It was indeed a farce
that the staunchly anticolonial Stevens would be concerned with
controlling the same people, the Mende, whom the British had sought
to control; that he would rely on the same chiefs whom the British
had empowered and then used to control the hinterland; that he
would run the economy in the same way, expropriating the farmers
with the same marketing boards and controlling the diamonds under
a similar monopoly. It was indeed a farce, a very sad farce indeed,
that Laurent Kabila, who mobilized an army against Mobutu’s
dictatorship with the promise of freeing the people and ending the
stifling and impoverishing corruption and repression of Mobutu’s
Zaire, would then set up a regime just as corrupt and perhaps even
more disastrous. It was certainly farcical that he tried to start a

Mobutuesque personality cult aided and abetted by Dominique
Sakombi Inongo, previously Mobutu’s minister of information, and
that Mobutu’s regime was itself fashioned on patterns of exploitation
of the masses that had started more than a century previously with
King Leopold’s Congo Free State. It was indeed a farce that the
Marxist officer Mengistu would start living in a palace, viewing
himself as an emperor, and enriching himself and his entourage just
like Haile Selassie and other emperors before him had done.

It was all a farce, but also more tragic than the original tragedy,
and not only for the hopes that were dashed. Stevens and Kabila, like
many other rulers in Africa, would start murdering their opponents
and then innocent citizens. Mengistu and the Derg’s policies would
bring recurring famine to Ethiopia’s fertile lands. History was
repeating itself, but in a very distorted form. It was a famine in Wollo
province in 1973 to which Haile Selassie was apparently indifferent
that did so much finally to solidify opposition to his regime. Selassie
had at least been only indifferent. Mengistu instead saw famine as a
political tool to undermine the strength of his opponents. History was
not only farcical and tragic, but also cruel to the citizens of Ethiopia
and much of sub-Saharan Africa.

The essence of the iron law of oligarchy, this particular facet of the
vicious circle, is that new leaders overthrowing old ones with
promises of radical change bring nothing but more of the same. At
some level, the iron law of oligarchy is harder to understand than
other forms of the vicious circle. There is a clear logic to the
persistence of the extractive institutions in the U.S. South and in
Guatemala. The same groups continued to dominate the economy and
the politics for centuries. Even when challenged, as the U.S. southern
planters were after the Civil War, their power remained intact and
they were able to keep and re-create a similar set of extractive
institutions from which they would again benefit. But how can we
understand those who come to power in the name of radical change
re-creating the same system? The answer to this question reveals,
once again, that the vicious circle is stronger than it first appears.

Not all radical changes are doomed to failure. The Glorious

Revolution was a radical change, and it led to what perhaps turned
out to be the most important political revolution of the past two
millennia. The French Revolution was even more radical, with its
chaos and excessive violence and the ascent of Napoleon Bonaparte,
but it did not re-create the ancien regime.

Three factors greatly facilitated the emergence of more inclusive
political institutions following the Glorious Revolution and the French
Revolution. The first was new merchants and businessmen wishing to
unleash the power of creative destruction from which they themselves
would benefit; these new men were among the key members of the
revolutionary coalitions and did not wish to see the development of
yet another set of extractive institutions that would again prey on
them.

The second was the nature of the broad coalition that had formed
in both cases. For example, the Glorious Revolution wasn’t a coup by
a narrow group or a specific narrow interest, but a movement backed
by merchants, industrialists, the gentry, and diverse political
groupings. The same was largely true for the French Revolution.

The third factor relates to the history of English and French
political institutions. They created a background against which new,
more inclusive regimes could develop. In both countries there was a
tradition of parliaments and power sharing going back to the Magna
Carta in England and to the Assembly of Notables in France.
Moreover, both revolutions happened in the midst of a process that
had already weakened the grasp of the absolutist, or aspiring
absolutist, regimes. In neither case would these political institutions
make it easy for a new set of rulers or a narrow group to take control
of the state and usurp existing economic wealth and build unchecked
and durable political power. In the aftermath of the French
Revolution, a narrow group under the leadership of Robespierre and
Saint-Just did take control, with disastrous consequences, but this was
temporary and did not derail the path toward more inclusive
institutions. All this contrasts with the situation of societies with long
histories of extreme extractive economic and political institutions,
and no checks on the power of rulers. In these societies, there would

be no new strong merchants or businessmen supporting and
bankrolling the resistance against the existing regime in part to secure
more inclusive economic institutions; no broad coalitions introducing
constraints against the power of each of their members; no political
institutions inhibiting new rulers intent on usurping and exploiting
power.

In consequence, in Sierra Leone, Ethiopia, and the Congo, the
vicious circle would be far harder to resist, and moves toward
inclusive institutions far more unlikely to get under way. There were
also no traditional or historical institutions that could check the
power of those who would take control of the state. Such institutions
had existed in some parts of Africa, and some, as in Botswana, even
survived the colonial era. But they were much less prominent
throughout Sierra Leone’s history, and to the extent that they existed,
they were warped by indirect rule. The same was true in other British
colonies in Africa, such as Kenya and Nigeria. They never existed in
the absolutist kingdom of Ethiopia. In the Congo, indigenous
institutions were emasculated by Belgian colonial rule and the
autocratic policies of Mobutu. In all these societies, there were also
no new merchants, businessmen, or entrepreneurs supporting the new
regimes and demanding secure property rights and an end to previous
extractive institutions. In fact, the extractive economic institutions of
the colonial period meant that there was not much entrepreneurship
or business left at all.

The international community thought that postcolonial African
independence would lead to economic growth through a process of
state planning and cultivation of the private sector. But the private
sector was not there — except in rural areas, which had no
representation in the new governments and would thus be their first
prey. Most important perhaps, in most of these cases there were
enormous benefits from holding power. These benefits both attracted
the most unscrupulous men, such as Stevens, who wished to
monopolize this power, and brought the worst out of them once they
were in power. There was nothing to break the vicious circle.

Negative Feedback and Vicious Circles

Rich nations are rich largely because they managed to develop
inclusive institutions at some point during the past three hundred
years. These institutions have persisted through a process of virtuous
circles. Even if inclusive only in a limited sense to begin with, and
sometimes fragile, they generated dynamics that would create a
process of positive feedback, gradually increasing their inclusiveness.
England did not become a democracy after the Glorious Revolution of
1688. Far from it. Only a small fraction of the population had formal
representation, but crucially, she was pluralistic. Once pluralism was
enshrined, there was a tendency for the institutions to become more
inclusive over time, even if this was a rocky and uncertain process.

In this, England was typical of virtuous circles: inclusive political
institutions create constraints against the exercise and usurpation of
power. They also tend to create inclusive economic institutions,
which in turn make the continuation of inclusive political institutions
more likely.

Under inclusive economic institutions, wealth is not concentrated
in the hands of a small group that could then use its economic might
to increase its political power disproportionately. Furthermore, under
inclusive economic institutions there are more limited gains from
holding political power, thus weaker incentives for every group and
every ambitious, upstart individual to try to take control of the state.
A confluence of factors at a critical juncture, including interplay
between existing institutions and the opportunities and challenges
brought by the critical juncture, is generally responsible for the onset
of inclusive institutions, as the English case demonstrates. But once
these inclusive institutions are in place, we do not need the same
confluence of factors for them to survive. Virtuous circles, though still
subject to significant contingency, enable the institutions’ continuity
and often even unleash dynamics taking society toward greater
inclusiveness.

As virtuous circles make inclusive institutions persist, vicious
circles create powerful forces toward the persistence of extractive

institutions. History is not destiny, and vicious circles are not
unbreakable, as we will see further in chapter 14. But they are
resilient. They create a powerful process of negative feedback, with
extractive political institutions forging extractive economic
institutions, which in turn create the basis for the persistence of
extractive political institutions. We saw this most clearly in the case
of Guatemala, where the same elite held power, first under colonial
rule, then in independent Guatemala, for more than four centuries;
extractive institutions enrich the elite, and their wealth forms the
basis for the continuation of their domination.

The same process of the vicious circle is also apparent in the
persistence of the plantation economy in the U.S. South, except that it
also showcases the vicious circle’s great resilience in the face of
challenges. U.S. southern planters lost their formal control of
economic and political institutions after their defeat in the Civil War.
Slavery, which was the basis of the plantation economy, was
abolished, and blacks were given equal political and economic rights.
Yet the Civil War did not destroy the political power of the planter
elite or its economic basis, and they were able to restructure the
system, under a different guise but still under their own local political
control, and to achieve the same objective: abundance of low-cost
labor for the plantations.

This form of the vicious circle, where extractive institutions persist
because the elite controlling them and benefiting from them persists,
is not its only form. At first a more puzzling, but no less real and no
less vicious, form of negative feedback shaped the political and
economic development of many nations, and is exemplified by the
experiences of much of sub-Saharan Africa, in particular Sierra Leone
and Ethiopia. In a form that the sociologist Robert Michels would
recognize as the iron law of oligarchy, the overthrow of a regime
presiding over extractive institutions heralds the arrival of a new set
of masters to exploit the same set of pernicious extractive institutions.

The logic of this type of vicious circle is also simple to understand
in hindsight: extractive political institutions create few constraints on
the exercise of power, so there are essentially no institutions to

restrain the use and abuse of power by those overthrowing previous
dictators and assuming control of the state; and extractive economic
institutions imply that there are great profits and wealth to be made
merely by controlling power, expropriating the assets of others, and
setting up monopolies.

Of course, the iron law of oligarchy is not a true law, in the sense
that the laws of physics are. It does not chart an inevitable path, as
the Glorious Revolution in England or the Meiji Restoration in Japan
illustrate.

A key factor in these episodes, which saw a major turn toward
inclusive institutions, was the empowerment of a broad coalition that
could stand up against absolutism and would replace the absolutist
institutions by more inclusive, pluralistic ones. A revolution by a
broad coalition makes the emergence of pluralistic political
institutions much more likely. In Sierra Leone and Ethiopia, the iron
law of oligarchy was made more likely not only because existing
institutions were highly extractive but also because neither the
independence movement in the former nor the Derg coup in the latter
were revolutions led by such broad coalitions, but rather by
individuals and groups seeking power so that they could do the
extracting.

There is yet another, even more destructive facet of the vicious
circle, anticipated by our discussion of the Maya city-states in chapter
5. When extractive institutions create huge inequalities in society and
great wealth and unchecked power for those in control, there will be
many wishing to fight to take control of the state and institutions.
Extractive institutions then not only pave the way for the next
regime, which will be even more extractive, but they also engender
continuous infighting and civil wars. These civil wars then cause
more human suffering and also destroy even what little state
centralization these societies have achieved. This also often starts a
process of descent into lawlessness, state failure, and political chaos,
crushing all hopes of economic prosperity, as the next chapter will
illustrate.

13 .

WHY NATIONS FAIL TODAY

How to Win the Lottery in Zimbabwe

It was January 2000 in Harare, Zimbabwe. Master of Ceremonies Fallot

Chawawa was in charge of drawing the winning ticket for the
national lottery organized by a partly state-owned bank, the
Zimbabwe Banking Corporation (Zimbank). The lottery was open to
all clients who had kept five thousand or more Zimbabwe dollars in
their accounts during December 1999. When Chawawa drew the
ticket, he was dumfounded. As the public statement of Zimbank put
it, “Master of Ceremonies Fallot Chawawa could hardly believe his
eyes when the ticket drawn for the Z$100,000 prize was handed to
him and he saw His Excellency RG Mugabe written on it.”

President Robert Mugabe, who had ruled Zimbabwe by hook or by
crook, and usually with an iron fist, since 1980, had won the lottery,
which was worth a hundred thousand Zimbabwe dollars, about five
times the annual per capita income of the country. Zimbank claimed
that Mr. Mugabe’s name had been drawn from among thousands of
eligible customers. What a lucky man! Needless to say he didn’t really
need the money. Mugabe had in fact only recently awarded himself
and his cabinet salary hikes of up to 200 percent.

The lottery ticket was just one more indication of Zimbabwe’s
extractive institutions. One could call this corruption, but it is just a
symptom of the institutional malaise in Zimbabwe. The fact that
Mugabe could even win the lottery if he wanted showed how much
control he had over matters in Zimbabwe, and gave the world a
glimpse of the extent of the country’s extractive institutions.

The most common reason why nations fail today is because they

have extractive institutions. Zimbabwe under Mugabe’s regime
vividly illustrates the economic and social consequences. Though the
national statistics in Zimbabwe are very unreliable, the best estimate
is that by 2008, Zimbabwe’s per capita income was about half of what
it was when the country gained its independence in 1980. Dramatic
as this sounds, it does not in fact begin to capture the deterioration in
living standards in Zimbabwe. The state has collapsed and more or
less stopped providing any basic public services. In 2008-2009 the
deterioration in the health systems led to an outbreak of cholera
across the country. As of January 10, 2010, there have been 98,741
reported cases and 4,293 deaths, making it the deadliest cholera
outbreak in Africa over the previous fifteen years. In the meantime,
mass unemployment has also reached unprecedented levels. In early
2009, the UN Office for the Coordination of Humanitarian Affairs
claimed that the unemployment rate had hit an incredible 94 percent.

The roots of many economic and political institutions in Zimbabwe,
as is the case for much of sub-Saharan Africa, can be traced back to
the colonial period. In 1890 Cecil Rhodes’s British South Africa
Company sent a military expedition into the then-kingdom of the
Ndebele, based in Matabeleland, and also into the neighboring
Mashonaland. Their superior weaponry quickly suppressed African
resistance, and by 1901 the colony of Southern Rhodesia, named after
Rhodes, had been formed in the area that is currently Zimbabwe.
Now that the area was a privately owned concession of the British
South Africa Company, Rhodes anticipated making money there
through prospecting and mining for precious minerals. The ventures
never got off the ground, but the very rich farmlands began attracting
white migration. These settlers soon annexed much of the land. By
1923 they had freed themselves from the rule of the British South
Africa Company and persuaded the British government to grant them
self-government. What then occurred is very similar to what had
happened in South Africa a decade or so previously. The 1913 Natives
Land Act (this page-this page) created a dual economy in South
Africa. Rhodesia passed very similar laws, and inspired by the South
African model, a white-only apartheid state was constructed soon

after 1923.

As the European colonial empires collapsed in the late 1950s and
early 1960s, the white elite in Rhodesia, led by Ian Smith, comprising
possibly 5 percent of the population, declared independence from
Britain in 1965. Few international governments recognized Rhodesia’s
independence, and the United Nations levied economic and political
sanctions against it. The black citizens organized a guerrilla war from
bases in the neighboring countries of Mozambique and Zambia.
International pressure and the rebellion waged by the two main
groups, Mugabe’s ZANU (the Zimbabwe African National Union) and
ZAPU (the Zimbabwe African People’s Union), led by Joshua Nkomo,
resulted in a negotiated end to white rule. The state of Zimbabwe was
created in 1980.

After independence, Mugabe quickly established his personal
control. He either violently eliminated his opponents or co-opted
them. The most egregious acts of violence happened in Matabeleland,
the heartland of support for ZAPU, where as many as twenty
thousand people were killed in the early 1980s. By 1987 ZAPU had
merged with ZANU to create ZANU-PF, and Joshua Nkomo was
sidelined politically. Mugabe was able to rewrite the constitution he
had inherited as a part of the independence negotiation, making
himself president (he had started as prime minister), abolishing white
voter rolls that were part of the independence agreement, and
eventually, in 1990, getting rid of the Senate altogether and
introducing positions in the legislature that he could nominate. A de
facto one-party state headed by Mugabe was the result.

Upon independence, Mugabe took over a set of extractive economic
institutions created by the white regime. These included a host of
regulations on prices and international trade, state-run industries, and
the obligatory agricultural marketing boards. State employment
expanded rapidly, with jobs given to supporters of ZANU-PF. The
tight government regulation of the economy suited the ZANU-PF
elites because it made it difficult for an independent class of African
businessmen, who might then have challenged the former’s political
monopoly, to emerge. This was very similar to the situation we saw in

Ghana in the 1960s in chapter 2 (this page-this page). Ironically, of
course, this left whites as the main business class. During this period
the main strengths of the white economy, particularly the highly
productive agricultural export sector, was left untouched. But this
would last only until Mugabe became unpopular.

The model of regulation and market intervention gradually became
unsustainable, and a process of institutional change, with the support
of the World Bank and the International Monetary Fund, began in
1991 after a severe fiscal crisis. The deteriorating economic
performance finally led to the emergence of a serious political
opposition to ZANU-PF’s one-party rule: the Movement for
Democratic Change (MDC). The 1995 parliamentary elections were
far from competitive. ZANU-PF won 81 percent of the vote and 118
out of the 120 seats. Fifty-five of these members of Parliament were
elected unopposed. The presidential election the following year
showed even more signs of irregularities and fraud. Mugabe won 93
percent of the vote, but his two opponents, Abel Muzorewa and
Ndabaningi Sithole, had already withdrawn their candidacy prior to
the election, accusing the government of coercion and fraud.

After 2000, despite all the corruption, ZANU-PF’s grip was
weakening. It took only 49 percent of the popular vote, and only 63
seats. All were contested by the MDC, who took every seat in the
capital, Harare. In the presidential election of 2002, Mugabe scraped
home with only 56 percent of the vote. Both sets of elections went
ZANU-PF’s way only because of violence and intimidation, coupled
with electoral fraud.

The response of Mugabe to the breakdown of his political control
was to intensify both the repression and the use of government
policies to buy support. He unleashed a full-scale assault on white
landowners. Starting in 2000, he encouraged and supported an
extensive series of land occupations and expropriations. They were
often led by war veterans’ associations, groups supposedly comprised
of former combatants in the war of independence. Some of the
expropriated land was given to these groups, but much of it also went
to the ZANU-PF elites. The insecurity of property rights wrought by

Mugabe and ZANU-PF led to a collapse of agricultural output and
productivity. As the economy crumbled, the only thing left was to
print money to buy support, which led to enormous hyperinflation. In
January 2009, it became legal to use other currencies, such as the
South African rand, and the Zimbabwean dollar vanished from
circulation, a worthless piece of paper.

What happened in Zimbabwe after 1980 was commonplace in sub-
Saharan Africa since independence. Zimbabwe inherited a set of
highly extractive political and economic institutions in 1980. For the
first decade and a half, these were maintained relatively untouched.
While elections took place, political institutions were anything but
inclusive. Economic institutions changed somewhat; for example,
there was no longer explicit discrimination against blacks. But on the
whole the institutions remained extractive, with the only difference
being that instead of Ian Smith and the whites doing the extracting, it
was Robert Mugabe and the ZANU-PF elites filling their pockets. Over
time the institutions became even more extractive, and incomes in
Zimbabwe collapsed. The economic and political failure in Zimbabwe
is yet another manifestation of the iron law of oligarchy — in this
instance, with the extractive and repressive regime of Ian Smith being
replaced by the extractive, corrupt, and repressive regime of Robert
Mugabe. Mugabe’s fake lottery win in 2000 was then simply the tip of
a very corrupt and historically shaped iceberg.

Nations fail today because their extractive economic institutions do not
create the incentives needed for people to save, invest, and innovate.
Extractive political institutions support these economic institutions by
cementing the power of those who benefit from the extraction.
Extractive economic and political institutions, though their details
vary under different circumstances, are always at the root of this
failure. In many cases, for example, as we will see in Argentina,
Colombia, and Egypt, this failure takes the form of lack of sufficient
economic activity, because the politicians are just too happy to
extract resources or quash any type of independent economic activity

that threatens themselves and the economic elites. In some extreme
cases, as in Zimbabwe and Sierra Leone, which we discuss next,
extractive institutions pave the way for complete state failure,
destroying not only law and order but also even the most basic
economic incentives. The result is economic stagnation and — as the
recent history of Angola, Cameroon, Chad, the Democratic Republic
of Congo, Haiti, Liberia, Nepal, Sierra Leone, Sudan, and Zimbabwe
illustrates — civil wars, mass displacements, famines, and epidemics,
making many of these countries poorer today than they were in the
1960s.

A Children’s Crusade?

On March 23, 1991, a group of armed men under the leadership of
Foday Sankoh crossed the border from Liberia into Sierra Leone and
attacked the southern frontier town of Kailahun. Sankoh, formerly a
corporal in the Sierra Leonean army, had been imprisoned after
taking part in an abortive coup against Siaka Stevens’s government in
1971. After being released, he eventually ended up in Libya, where he
entered a training camp that the Libyan dictator Colonel Qaddafi ran
for African revolutionaries. There he met Charles Taylor, who was
plotting to overthrow the government in Liberia. When Taylor
invaded Liberia on Christmas Eve 1989, Sankoh was with him, and it
was with a group of Taylor’s men, mostly Liberians and Burkinabes
(citizens of Burkina Faso), that Sankoh invaded Sierra Leone. They
called themselves the RUF, the Revolutionary United Front, and they
announced that they were there to overthrow the corrupt and
tyrannical government of the APC.

As we saw in the previous chapter, Siaka Stevens and his All
People’s Congress, the APC, took over and intensified the extractive
institutions of colonial rule in Sierra Leone, just as Mugabe and
ZANU-PF did in Zimbabwe. By 1985, when Stevens, ill with cancer,
brought in Joseph Momoh to replace him, the economy was
collapsing. Stevens, apparently without irony, used to enjoy quoting
the aphorism “The cow eats where it is tethered.” And where Stevens

had once eaten, Momoh now gorged. The roads fell to pieces, and
schools disintegrated. National television broadcasts stopped in 1987,
when the transmitter was sold by the minister of information, and in
1989 a radio tower that relayed radio signals outside Freetown fell
down, ending transmissions outside the capital. An analysis published
in a newspaper in the capital city of Freetown in 1995 rings very true:

by the end of Momoh’s rule he had stopped paying civil
servants, teachers and even Paramount Chiefs. Central
government had collapsed, and then of course we had
border incursions, “rebels” and all the automatic weapons
pouring over the border from Liberia. The NPRC, the
“rebels” and the “sobels” [soldiers turned rebels] all
amount to the chaos one expects when government
disappears. None of them are the causes of our problems,
but they are symptoms.

The collapse of the state under Momoh, once again a consequence
of the vicious circle unleashed by the extreme extractive institutions
under Stevens, meant that there was nothing to stop the RUF from
coming across the border in 1991. The state had no capacity to
oppose it. Stevens had already emasculated the military, because he
worried they might overthrow him. It was then easy for a relatively
small number of armed men to create chaos in most of the country.
They even had a manifesto called “Footpaths to Democracy,” which
started with a quote from the black intellectual Frantz Fanon: “Each
generation must, out of relative obscurity, discover its mission, fulfill
it or betray it.” The section “What Are We Fighting For?” begins:

We continue to fight because we are tired of being
perpetual victims of state sponsored poverty and human
degradation visited on us by years of autocratic rule and
militarism. But, we shall exercise restraint and continue to
wait patiently at the rendezvous of peace — where we shall
all be winners. We are committed to peace, by any means
necessary, but what we are not committed to is becoming

victims of peace. We know our cause to be just and
God/ Allah will never abandon us in our struggle to
reconstruct a new Sierra Leone.

Though Sankoh and other RUF leaders may have started with
political grievances, and the grievances of the people suffering under
the APC’s extractive institutions may have encouraged them to join
the movement early on, the situation quickly changed and spun out of
control. The “mission” of the RUF plunged the country into agony, as
in the testimony of a teenager from Geoma, in the south of Sierra
Leone:

They gathered some of us ... They chose some of our
friends and killed them, two of them. These were people
whose fathers were the chiefs, and they had soldiers’ boots
and property in their houses. They were shot, for no other
reason than that they were accused of harbouring soldiers.

The chiefs were also killed — as part of the government.

They chose someone to be the new chief. They were still
saying they had come to free us from the APC. After a
point, they were not choosing people to kill, just shooting
people.

In the first year of the invasion, any intellectual roots that the RUF
may have had were completely extinguished. Sankoh executed those
who criticized the mounting stream of atrocities. Soon, few
voluntarily joined the RUF. Instead they turned to forcible
recruitment, particularly of children. Indeed, all sides did this,
including the army. If the Sierra Leonean civil war was a crusade to
build a better society, in the end it was a children’s crusade. The
conflict intensified with massacres and massive human rights abuses,
including mass rapes and the amputation of hands and ears. When the
RUF took over areas, they also engaged in economic exploitation. It
was most obvious in the diamond mining areas, where they press-
ganged people into diamond mining, but was widespread elsewhere
as well.

The RUF wasn’t alone in committing atrocities, massacres, and
organized forced labor. The government did so as well. Such was the
collapse of law and order that it became difficult for people to tell
who was a soldier and who was a rebel. Military discipline
completely vanished. By the time the war ended in 2001, probably
eighty thousand people had died and the whole country had been
devastated. Roads, houses, and buildings were entirely destroyed.
Today, if you go to Koidu, a major diamond-producing area in the
east, you’ll still see rows of burned-out houses scarred with bullet
holes.

By 1991 the state in Sierra Leone had totally failed. Think of what
King Shyaam started with the Bushong (this page-this page): he set
up extractive institutions to cement his power and extract the output
the rest of society would produce. But even extractive institutions
with central authority concentrated in his hands were an
improvement over the situation without any law and order, central
authority, or property rights that characterized the Lele society on the
other side of the river Kasai. Such lack of order and central authority
has been the fate of many African nations in recent decades, partly
because the process of political centralization was historically delayed
in much of sub-Saharan Africa, but also because the vicious circle of
extractive institutions reversed any state centralization that existed,
paving the way for state failure.

Sierra Leone during her bloody civil war of ten years, from 1991 to
2001, was a typical case of a failed state. It started out as just another
country marred by extractive institutions, albeit of a particularly
vicious and inefficient type. Countries become failed states not
because of their geography or their culture, but because of the legacy
of extractive institutions, which concentrate power and wealth in the
hands of those controlling the state, opening the way for unrest,
strife, and civil war. Extractive institutions also directly contribute to
the gradual failing of the state by neglecting investment in the most
basic public services, exactly what happened in Sierra Leone.

Extractive institutions that expropriate and impoverish the people
and block economic development are quite common in Africa, Asia,

and South America. Charles Taylor helped to start the civil war in
Sierra Leone while at the same time initiating a savage conflict in
Liberia, which led to state failure there, too. The pattern of extractive
institutions collapsing into civil war and state failure has happened
elsewhere in Africa; for example, in Angola, Cote d’Ivoire, the
Democratic Republic of Congo, Mozambique, Republic of Congo,
Somalia, Sudan, and Uganda. Extraction paves the way for conflict,
not unlike the conflict that the highly extractive institutions of the
Maya city-states generated almost a thousand years ago. Conflict
precipitates state failure. So another reason why nations fail today is
that their states fail. This, in turn, is a consequence of decades of rule
under extractive economic and political institutions.

Who Is the State?

The cases of Zimbabwe, Somalia, and Sierra Leone, even if typical of
poor countries in Africa, and perhaps even some in Asia, seem rather
extreme. Surely Latin American countries do not have failed states?
Surely their presidents are not brazen enough to win the lottery?

In Colombia, the Andean Mountains gradually merge to the north
with a large coastal plain that borders the Caribbean Ocean.
Colombians call this the tierra caliente, the “hot country,” as distinct
from the Andean world of the tierra fria, the “cold country.” For the
last fifty years, Colombia has been regarded by most political
scientists and governments as a democracy. The United States feels
happy to negotiate a potential free trade agreement with the country
and pours all kinds of aid into it, particularly military aid. After a
short-lived military government, which ended in 1958, elections have
been regularly held, even though until 1974 a pact rotated political
power and the presidency between the two traditional political
parties, the Conservatives and the Liberals. Still, this pact, the
National Front, was itself ratified by the Colombian people via a
plebiscite, and this all seems democratic enough.

Yet while Colombia has a long history of democratic elections, it
does not have inclusive institutions. Instead, its history has been

marred by violations of civil liberties, extrajudicial executions,
violence against civilians, and civil war. Not the sort of outcomes we
expect from a democracy. The civil war in Colombia is different from
that in Sierra Leone, where the state and society collapsed and chaos
reigned. But it is a civil war nonetheless and one that has caused far
more casualties. The military rule of the 1950s was itself partially in
response to a civil war known in Spanish simply as La Violencia, or
“The Violence.” Since that time quite a range of insurgent groups,
mostly communist revolutionaries, have plagued the countryside,
kidnapping and murdering. To avoid either of these unpleasant
options in rural Colombia, you have to pay the vacuna, literally “the
vaccination,” meaning that you have to vaccinate yourself against
being murdered or kidnapped by paying off some group of armed
thugs each month.

Not all armed groups in Colombia are communists. In 1981
members of the main communist guerrilla group in Colombia, the
Fuerzas Armadas Revolucionarias de Colombia (the FARC — the
Revolutionary Armed Forces of Colombia) kidnapped a dairy farmer,
Jesus Castano, who lived in a small town called Amalfi in the hot
country in the northeastern part of the department of Antioquia. The
FARC demanded a ransom amounting to $7,500, a small fortune in
rural Colombia. The family raised it by mortgaging the farm, but their
father’s corpse was found anyway, chained to a tree. Enough was
enough for three of Castano’s sons, Carlos, Fidel, and Vicente. They
founded a paramilitary group, Los Tangueros, to hunt down members
of the FARC and avenge this act. The brothers were good at
organizing, and soon their group grew and began to find a common
interest with other similar paramilitary groups that had developed
from similar causes. Colombians in many areas were suffering at the
hands of left-wing guerrillas, and right-wing paramilitaries formed in
opposition. Paramilitaries were being used by landowners to defend
themselves against the guerrillas, but they were also involved in drug
trafficking, extortion, and the kidnapping and murder of citizens.

By 1997 the paramilitaries, under the leadership of the Castano
brothers, had managed to form a national organization for

paramilitaries called the Autodefensas Unidas de Colombia (the AUC
— United Self-Defense Forces of Colombia). The AUC expanded into
large parts of the country, particularly into the hot country, in the
departments of Cordoba, Sucre, Magdalena, and Cesar. By 2001 the
AUC may have had as many as thirty thousand armed men at its
disposal and was organized into different blocks. In Cordoba, the
paramilitary Bloque Catatumbo was led by Salvatore Mancuso. As its
power continued to grow, the AUC made a strategic decision to get
involved in politics. Paramilitaries and politicians courted each other.
Several of the leaders of the AUC organized a meeting with prominent
politicians in the town of Santa Fe de Ralito in Cordoba. A joint
document, a pact, calling for the “refounding of the country” was
issued and signed by leading members of the AUC, such as “Jorge 40”
(the nickname for Rodrigo Tovar Pupo), Adolfo Paz (a nom de guerre
for Diego Fernando “Don Berna” Murillo), and Diego Vecino (real
name: Edwar Cobo Tellez), along with politicians, including national
senators William Montes and Miguel de la Espriella. By this point the
AUC was running large tracts of Colombia, and it was easy for them
to fix who got elected in the 2002 elections for the Congress and
Senate. For example, in the municipality of San Onofre, in Sucre, the
election was arranged by the paramilitary leader Cadena (“chain”).
One eyewitness described what happened as follows:

The trucks sent by Cadena went around the
neighborhoods, corregimientos and rural areas of San
Onofre picking people up. According to some
inhabitants ... for the 2002 elections hundreds of peasants
were taken to the corregimiento Plan Parejo so they could
see the faces of the candidates they had to vote for in the
parliamentarian elections: Jairo Merlano for Senate and
Muriel Benito Rebollo for Congress.

Cadena put in a bag the names of the members of the
municipal council, took out two and said that he would
kill them and other people chosen randomly if Muriel did
not win.

The threat seems to have worked: each candidate obtained forty
thousand votes in the whole of Sucre. It is no surprise that the mayor
of San Onofre signed the pact of Santa Fe de Ralito. Probably one-
third of the congressmen and senators owed their election in 2002 to
paramilitary support, and Map 20, which depicts the areas of
Colombia under paramilitary control, shows how widespread their
hold was. Salvatore Mancuso himself put it in an interview in the
following way:

35 percent of the Congress was elected in areas where
there were states of the Self-Defense groups, in those states
we were the ones collecting taxes, we delivered justice,
and we had the military and territorial control of the
region and all the people who wanted to go into politics
had to come and deal with the political representatives we
had there.

It is not difficult to imagine the effect of this extent of paramilitary
control of politics and society on economic institutions and public
policy. The expansion of the AUC was not a peaceful affair. The group
not only fought against the FARC, but also murdered innocent
civilians and terrorized and displaced hundreds of thousands of
people from their homes. According to the Internal Displacement
Monitoring Centre (IDMC) of the Norwegian Refugee Council, in early
2010 around 10 percent of Colombia’s population, nearly 4.5 million
people, was internally displaced. The paramilitaries also, as Mancuso
suggested, took over the government and all its functions, except that
the taxes they collected were just expropriation for their own pockets.
An extraordinary pact between the paramilitary leader Martin Llanos
(real name: Hector German Buitrago) and the mayors of the
municipalities of Tauramena, Aguazul, Mani, Villanueva, Monterrey,
and Sabanalarga, in the department of Casanare in eastern Colombia,
lists the following rules to which the mayors had to adhere by order
of the “Paramilitary Peasants of Casanare”:

far.) military presence
Modern buund.irio

Ecuador

B.inranquilla
Cartage
San Onofre

Santd Ft; tic Ralitii

C6rdoba

Amalfi

Medellin

Bogota

Venezuela

Casanare

Colombia

Brazil

Peru

Map 20: Paramilitary presence across Colombia, 1997-2005

9) Give 50 percent of the municipality budget to be managed
by the Paramilitary Peasants of Casanare.

10) 10 percent of each and every contract of the municipality
[to be given to the Paramilitary Peasants of Casanare] .

11) Mandatory assistance to all the meetings called by the
Paramilitary Peasants of Casanare.

12) Inclusion of the Paramilitary Peasants of Casanare in every
infrastructure project.

13) Affiliation to the new political party formed by the
Paramilitary Peasants of Casanare.

14) Accomplishment of his/hers governance program.

Casanare is not a poor department. On the contrary, it has the
highest level of per capita income of any Colombian department,
because it has significant oil deposits, just the kind of resources that
attract paramilitaries. In fact, once they gained power, the
paramilitaries intensified their systematic expropriation of property.
Mancuso himself reputedly accumulated $25 million worth of urban
and rural property. Estimates of land expropriated in Colombia by
paramilitaries are as high as 10 percent of all rural land.

Colombia is not a case of a failed state about to collapse. But it is a
state without sufficient centralization and with far-from-complete
authority over all its territory. Though the state is able to provide
security and public services in large urban areas such as Bogota and
Barranquilla, there are significant parts of the country where it
provides few public services and almost no law and order. Instead,
alternative groups and people, such as Mancuso, control politics and
resources. In parts of the country, economic institutions function
quite well, and there are high levels of human capital and
entrepreneurial skill; in other parts the institutions are highly
extractive, even failing to provide a minimal degree of state authority.

It might be hard to understand how a situation like this can sustain
itself for decades, even centuries. But in fact, the situation has a logic
of its own, as a type of vicious circle. Violence and the absence of
centralized state institutions of this type enter into a symbiotic
relationship with politicians running the functional parts of the
society. The symbiotic relationship arises because national politicians
exploit the lawlessness in peripheral parts of the country, while
paramilitary groups are left to their own devices by the national

government.

This pattern became particularly apparent in the 2000s. In 2002 the

a

presidential election was won by Alvaro Uribe. Uribe had something
in common with the Castano brothers: his father had been killed by
the FARC. Uribe ran a campaign repudiating the attempts of the
previous administration to try to make peace with the FARC. In 2002
his vote share was 3 percentage points higher in areas with
paramilitaries than without them. In 2006, when he was reelected,
his vote share was 11 percentage points higher in such areas. If
Mancuso and his partners could deliver the vote for Congress and the
Senate, they could do so in presidential elections as well, particularly
for a president strongly aligned with their worldview and likely to be
lenient on them. As Jairo Angarita, Salvatore Mancuso’s deputy and
the former leader of the AUC’s Sinu and San Jorge blocs, declared in
September 2005, he was proud to work for the “reelection of the best
president we have ever had.”

Once elected, the paramilitary senators and congressmen voted for
what Uribe wanted, in particular changing the constitution so that he
could be reelected in 2006, which had not been allowed at the time of
his first election, in 2002. In exchange, President Uribe delivered a
highly lenient law that allowed the paramilitaries to demobilize.
Demobilization did not mean the end of paramilitarism, simply its
institutionalization in large parts of Colombia and the Colombian
state, which the paramilitaries had taken over and were allowed to
keep.

In Colombia many aspects of economic and political institutions
have become more inclusive over time. But certain major extractive
elements remain. Lawlessness and insecure property rights are
endemic in large swaths of the country, and this is a consequence of
the lack of control by the national state in many parts of the country,
and the particular form of lack of state centralization in Colombia.
But this state of affairs is not an inevitable outcome. It is itself a
consequence of dynamics mirroring the vicious circle: political
institutions in Colombia do not generate incentives for politicians to
provide public services and law and order in much of the country and

do not put enough constraints on them to prevent them from entering
into implicit or explicit deals with paramilitaries and thugs.

El Corralito

Argentina was in the grip of an economic crisis in late 2001. For three
years, income had been falling, unemployment had been rising, and
the country had accumulated a massive international debt. The
policies leading to this situation were adopted after 1989 by the
government of Carlos Menem, to stop hyperinflation and stabilize the
economy. For a time they were successful.

In 1991 Menem tied the Argentine peso to the U.S. dollar. One peso
was equal to one dollar by law. There was to be no change in the
exchange rate. End of story. Well, almost. To convince people that the
government really meant to stick to the law, it persuaded people to
open bank accounts in U.S. dollars. Dollars could be used in the shops
of the capital city of Buenos Aires and withdrawn from cash machines
all over the city. This policy may have helped stabilize the economy,
but it had one big drawback. It made Argentine exports very
expensive and foreign imports very cheap. Exports dribbled to a halt;
imports gushed in. The only way to pay for them was to borrow. It
was an unsustainable situation. As more people began worrying about
the sustainability of the peso, they put more of their wealth into
dollar accounts at banks. After all, if the government ripped up the
law and devalued the peso, they would be safe with dollar accounts,
right? They were right to be worried about the peso. But they were
too optimistic about their dollars.

On December 1, 2001, the government froze all bank accounts,
initially for ninety days. Only a small amount of cash was allowed for
withdrawal on a weekly basis. First it was 250 pesos, still worth
$250; then 300 pesos. But this was allowed to be withdrawn only
from peso accounts. Nobody was allowed to withdraw money from
their dollar accounts, unless they agreed to convert the dollars into
pesos. Nobody wanted to do so. Argentines dubbed this situation El
Corralito, “the Little Corral”: depositors were hemmed into a corral

like cows, with nowhere to go. In January the devaluation was finally
enacted, and instead of there being one peso for one dollar, there
were soon four pesos for one dollar. This should have been a
vindication of those who thought that they should put their savings in
dollars. But it wasn’t, because the government then forcibly converted
all the dollar bank accounts into pesos, but at the old one-for-one
exchange rate. Someone who had had $1,000 saved suddenly found
himself with only $250. The government had expropriated three-
quarters of people’s savings.

For economists, Argentina is a perplexing country. To illustrate
how difficult it was to understand Argentina, the Nobel Prize-winning
economist Simon Kuznets once famously remarked that there were
four sorts of countries: developed, underdeveloped, Japan, and
Argentina. Kuznets thought so because, around the time of the First
World War, Argentina was one of the richest countries in the world. It
then began a steady decline relative to the other rich countries in
Western Europe and North America, which turned, in the 1970s and
’80s, into an absolute decline. On the surface of it, Argentina’s
economic performance is puzzling, but the reasons for its decline
become clearer when looked at through the lens of inclusive and
extractive institutions.

It is true that before 1914, Argentina experienced around fifty years
of economic growth, but this was a classic case of growth under
extractive institutions. Argentina was then ruled by a narrow elite
heavily invested in the agricultural export economy. The economy
grew by exporting beef, hides, and grain in the middle of a boom in
the world prices of these commodities. Like all such experiences of
growth under extractive institutions, it involved no creative
destruction and no innovation. And it was not sustainable. Around
the time of the First World War, mounting political instability and
armed revolts induced the Argentine elites to try to broaden the
political system, but this led to the mobilization of forces they could
not control, and in 1930 came the first military coup. Between then
and 1983, Argentina oscillated backward and forward between
dictatorship and democracy and between various extractive

institutions. There was mass repression under military rule, which
peaked in the 1970s with at least nine thousand people and probably
far more being illegally executed. Hundreds of thousands were
imprisoned and tortured.

During the periods of civilian rule there were elections — a
democracy of sorts. But the political system was far from inclusive.
Since the rise of Peron in the 1940s, democratic Argentina has been
dominated by the political party he created, the Partido Justicialista,
usually just called the Peronist Party. The Peronists won elections
thanks to a huge political machine, which succeeded by buying votes,
dispensing patronage, and engaging in corruption, including
government contracts and jobs in exchange for political support. In a
sense this was a democracy, but it was not pluralistic. Power was
highly concentrated in the Peronist Party, which faced few constraints
on what it could do, at least in the period when the military
restrained from throwing it from power. As we saw earlier (this
page-this page), if the Supreme Court challenged a policy, so much
the worse for the Supreme Court.

In the 1940s, Peron had cultivated the labor movement as a
political base. When it was weakened by military repression in the
1970s and ’80s, his party simply switched to buying votes from others
instead. Economic policies and institutions were designed to deliver
income to their supporters, not to create a level playing field. When
President Menem faced a term limit that kept him from being
reelected in the 1990s, it was just more of the same; he could simply
rewrite the constitution and get rid of the term limit. As El Corralito
shows, even if Argentina has elections and popularly elected
governments, the government is quite able to override property rights
and expropriate its own citizens with impunity. There is little check
on Argentine presidents and political elites, and certainly no
pluralism.

What puzzled Kuznets, and no doubt many others who visit Buenos
Aires, is that the city seems so different from Lima, Guatemala City,
or even Mexico City. You do not see indigenous people, and you do
not see the descendants of former slaves. Mostly you see the glorious

architecture and buildings put up during the Belle Epoch, the years of
growth under extractive institutions. But in Buenos Aires you see only
part of Argentina. Menem, for example, was not from Buenos Aires.
He was born in Anillaco, in the province of La Rioja, in the mountains
far to the northwest of Buenos Aires, and he served three terms as
governor of the province. At the time of the conquest of the Americas
by the Spanish, this area of Argentina was an outlying part of the Inca
Empire and had a dense population of indigenous people (see Map 1
on this page). The Spanish created encomiendas here, and a highly
extractive economy developed growing food and breeding mules for
the miners in Potosi to the north. In fact, La Rioja was much more
like the area of Potosi in Peru and Bolivia than it was like Buenos
Aires. In the nineteenth century, La Rioja produced the famous
warlord Facundo Quiroga, who ruled the area lawlessly and marched
his army on Buenos Aires. The story about the development of
Argentine political institutions is a story about how the interior
provinces, such as La Rioja, reached agreements with Buenos Aires.
These agreements were a truce: the warlords of La Rioja agreed to
leave Buenos Aires alone so that it could make money. In return, the
Buenos Aires elites gave up on reforming the institutions of “the
interior.” So Argentina at first appears a world apart from Peru or
Bolivia, but it is really not so different once you leave the elegant
boulevards of Buenos Aires. That the preferences and the politics of
the interior got embedded into Argentine institutions is the reason
why the country has experienced a very similar institutional path to
those of other extractive Latin American countries.

That elections have not brought either inclusive political or
economic institutions is the typical case in Latin America. In
Colombia, paramilitaries can fix one-third of national elections. In
Venezuela today, as in Argentina, the democratically elected
government of Hugo Chavez attacks its opponents, fires them from
public-sector jobs, closes down newspapers whose editorials it doesn’t
like, and expropriates property. In whatever he does, Chavez is much
more powerful and less constrained than Sir Robert Walpole was in
Britain in the 1720s, when he was unable to condemn John Huntridge

under the Black Act (this page-this page). Huntridge would have
fared much less well in present-day Venezuela or Argentina.

While the democracy emerging in Latin America is in principle
diametrically opposed to elite rule, and in rhetoric and action it tries
to redistribute rights and opportunities away from at least a segment
of the elite, its roots are firmly based in extractive regimes in two
senses. First, inequities persisting for centuries under extractive
regimes make voters in newly emerging democracies vote in favor of
politicians with extreme policies. It is not that Argentinians are just
naive and think that Juan Peron or the more recent Peronist
politicians such as Menem or the Kirchners are selfless and looking
out for their interests, or that Venezuelans see their salvation in
Chavez. Instead, many Argentinians and Venezuelans recognize that
all other politicians and parties have for so long failed to give them
voice, to provide them with the most basic public services, such as
roads and education, and to protect them from exploitation by local
elites. So many Venezuelans today support the policies that Chavez is
adopting even if these come with corruption and waste in the same
way that many Argentinians supported Peron’s policies in the 1940s
and 1970s. Second, it is again the underlying extractive institutions
that make politics so attractive to, and so biased in favor of,
strongmen such as Peron and Chavez, rather than an effective party
system producing socially desirable alternatives. Peron, Chavez, and
dozens of other strongmen in Latin America are just another facet of
the iron law of oligarchy, and as the name suggests, the roots of this
iron law lies in the underlying elite-controlled regimes.

The New Absolutism

In November 2009, the government of North Korea implemented
what economists call a currency reform. Severe bouts of inflation are
often the reasons for such reforms. In France in January 1960, a
currency reform introduced a new franc that was equal to 100 of the
existing francs. Old francs continued in circulation and people even
quoted prices in them as the change to the new francs was gradually

made. Finally, old francs ceased to be legal tender in January 2002,
when France introduced the euro. The North Korean reform looked
similar on the face of it. Like the French in 1960, the North Korean
government decided to take two zeros off the currency. One hundred
old wons, the currency of North Korea, were to be worth one new
won. Individuals were allowed to come forward to exchange their old
currency for the newly printed currency, though this had to be done
in one week, rather than forty-two years, as in the French case. Then
came the catch: the government announced that no one could convert
more than 100,000 won, though it later relaxed this to 500,000. One
hundred thousand won was about $40 at the black market exchange
rate. In one stroke, the government had wiped out a huge fraction of
North Korean citizens’ private wealth; we do not know exactly how
much, but it is probably greater than that expropriated by the
Argentine government in 2002.

The government in North Korea is a communist dictatorship
opposed to private property and markets. But it is difficult to control
black markets, and black markets make transactions in cash. Of
course quite a bit of foreign exchange is involved, particularly
Chinese currency, but many transactions use won. The currency
reform was designed to punish people who used these markets and,
more specifically, to make sure that they did not become too wealthy
or powerful enough to threaten the regime. Keeping them poor was
safer. Black markets are not the whole story. People in North Korea
also keep their savings in wons because there are few banks in Korea,
and they are all owned by the government. In effect, the government
used the currency reform to expropriate much of people’s savings.

Though the government says it regards markets as bad, the North
Korean elite rather like what markets can produce for them. The
leader, Kim Jong-Il, has a seven-story pleasure palace equipped with a
bar, a karaoke machine, and a mini movie theater. The ground floor
has an enormous swimming pool with a wave machine, where Kim
likes to use a body board fitted with a small motor. When in 2006 the
United States placed sanctions on North Korea, it knew how to really
hit the regime where it hurt. It made it illegal to export more than

sixty luxury items to North Korea, including yachts, water scooters,
racing cars, motorcycles, DVD players, and televisions larger than
twenty-nine inches. There would be no more silk scarves, designer
fountain pens, furs, or leather luggage. These were exactly the items
collected by Kim and his Communist Party elites. One scholar used
sales figures from the French company Hennessy to estimate that
Kim’s annual cognac budget before the sanctions could have been as
high as $800,000 a year.

It is impossible to understand many of the poorest regions of the
world at the end of the twentieth century without understanding the
new absolutism of the twentieth century: communism. Marx’s vision
was a system that would generate prosperity under more humane
conditions and without inequality. Lenin and his Communist Party
were inspired by Marx, but the practice could not have been more
different from the theory. The Bolshevik Revolution of 1917 was a
bloody affair, and there was no humane aspect to it. Equality was not
part of the equation, either, since the first thing Lenin and his
entourage did was to create a new elite, themselves, at the head of
the Bolshevik Party. In doing so, they purged and murdered not only
non-communist elements, but also other communists who could have
threatened their power. But the real tragedies were yet to come: first
with the Civil War, and then under Stalin’s collectivization and his
all-too-frequent purges, which may have killed as many as forty
million people. Russian communism was brutal, repressive, and
bloody, but not unique. The economic consequences and the human
suffering were quite typical of what happened elsewhere — for
example, in Cambodia in the 1970s under the Khmer Rouge, in China,
and in North Korea. In all cases communism brought vicious
dictatorships and widespread human rights abuses. Beyond the
human suffering and carnage, the communist regimes all set up
various types of extractive institutions. The economic institutions,
with or without markets, were designed to extract resources from the
people, and by entirely abhorring property rights, they often created
poverty instead of prosperity. In the Soviet case, as we saw in chapter
5, the Communist system at first generated rapid growth, but then

faltered and led to stagnation. The consequences were much more
devastating in China under Mao, in Cambodia under the Khmer
Rouge, and in North Korea, where the Communist economic
institutions led to economic collapse and famine.

The Communist economic institutions were in turn supported by
extractive political institutions, concentrating all power in the hands
of Communist parties and introducing no constraints on the exercise
of this power. Though these were different extractive institutions in
form, they had similar effects on the livelihoods of the people as the
extractive institutions in Zimbabwe and Sierra Leone.

King Cotton

Cotton accounts for about 45 percent of the exports of Uzbekistan,
making it the most important crop since the country established
independence at the breakup of the Soviet Union in 1991. Under
Soviet communism all farmland in Uzbekistan was under the control
of 2,048 state-owned farms. These were broken up and the land
distributed after 1991. But that didn’t mean farmers could act
independently. Cotton was too valuable to the new government of
Uzbekistan’s first, and so far only, president, Ismail Karimov. Instead,
regulations were introduced that determined what farmers could
plant and exactly how much they could sell it for. Cotton was a
valuable export, and farmers were paid a small fraction of world
market prices for their crop, with the government taking the rest.
Nobody would have grown cotton at the prices paid, so the
government forced them. Every farmer now has to allocate 35 percent
of his land to cotton. This caused many problems, difficulties with
machinery being one. At the time of independence, about 40 percent
of the harvest was picked by combine harvesters. After 1991, not
surprisingly, given the incentives that President Karimov’s regime
created for farmers, they were not willing to buy these or maintain
them. Recognizing the problem, Karimov came up with a solution, in
fact, a cheaper option than combine harvesters: schoolchildren.

The cotton bolls start to ripen and are ready to be picked in early

September, at about the same time that children return to school.
Karimov issued orders to local governors to send cotton delivery
quotas to schools. In early September the schools are emptied of 2.7
million children (2006 figures). Teachers, instead of being instructors,
became labor recruiters. Gulnaz, a mother of two of these children,
explained what happens:

At the beginning of each school year, approximately at the
beginning of September, the classes in school are
suspended, and instead of classes children are sent to the
cotton harvest. Nobody asks for the consent of parents.

They don’t have weekend holidays [during the harvesting
season]. If a child is for any reason left at home, his
teacher or class curator comes over and denounces the
parents. They assign a plan to each child, from 20 to 60 kg
per day depending on the child’s age. If a child fails to
fulfil this plan then next morning he is lambasted in front
of the whole class.

The harvest lasts for two months. Rural children lucky enough to be
assigned to farms close to home can walk or are bused to work.
Children farther away or from urban areas have to sleep in the sheds
or storehouses with the machinery and animals. There are no toilets
or kitchens. Children have to bring their own food for lunch.

The main beneficiaries from all this forced labor are the political
elites, led by President Karimov, the de facto king of all Uzbeki
cotton. The schoolchildren are supposedly paid for their labor, but
only supposedly. In 2006, when the world price of cotton was around
$1.40 (U.S.) per kilo, the children were paid about $0.03 for their
daily quota of twenty to sixty kilos. Probably 75 percent of the cotton
harvest is now picked by children. In the spring, school is closed for
compulsory hoeing, weeding, and transplanting.

How did it all come to this? Uzbekistan, like the other Soviet
Socialist Republics, was supposed to gain its independence after the
collapse of the Soviet Union and develop a market economy and

democracy. As in many other Soviet Republics, this is not what
happened, however. President Karimov, who began his political
career in the Communist Party of the old Soviet Union, rising to the
post of first secretary for Uzbekistan at the opportune moment of
1989, just as the Berlin Wall was collapsing, managed to reinvent
himself as a nationalist. With the crucial support of the security
forces, in December 1991 he won Uzbekistan’s first-ever presidential
election. After taking power, he cracked down on the independent
political opposition. Opponents are now in prison or exile. There is no
free media in Uzbekistan, and no nongovernmental organizations are
allowed. The apogee of the intensifying repression came in 2005,
when possibly 750, maybe more, demonstrators were murdered by
the police and army in Andijon.

Using this command of the security forces and total control of the
media, Karimov first extended his presidential term for five years,
through a referendum, and then won reelection for a new seven-year
term in 2000, with 91.2 percent of the vote. His only opponent
declared that he had voted for Karimov! In his 2007 reelection,
widely regarded as fraudulent, he won 88 percent of the vote.
Elections in Uzbekistan are similar to those that Joseph Stalin used to
organize in the heyday of the Soviet Union. One in 1937 was
famously covered by New York Times correspondent Harold Denny,
who reproduced a translation from Pravda, the newspaper of the
Communist Party, which was meant to convey the tension and
excitement of Soviet elections:

Midnight has struck. The twelfth of December, the day of
the first general, equal and direct elections to the Supreme
Soviet, has ended. The result of the voting is about to be
announced.

The commission remains alone in its room. It is quiet,
and the lamps are shining solemnly. Amid the general
attentive and intense expectation the chairman performs
all the necessary formalities before counting of the ballots
— checking up by list how many voters there were and

how many have voted — and the result is 100 per cent. 100
per cent! What election in what country for what
candidate has given a 100 per cent response?

The main business starts now. Excitedly the chairman
inspects the seals on the boxes. Then the members of the
commission inspect them. The seals are intact and are cut
off. The boxes are opened.

It is quiet. They sit attentively and seriously, these
election inspectors and executives.

Now it is time to open the envelopes. Three members of
the commission take scissors. The chairman rises. The
tellers have their copybooks ready. The first envelope is
slit. All eyes are directed to it. The chairman takes out two
slips — white [for a candidate for the Soviet of the Union]
and blue [for a candidate for the Soviet of Nationalities] —
and reads loudly and distinctly, “Comrade Stalin.”

Instantly the solemnity is broken. Everybody in the
room jumps up and applauds joyously and stormily for the
first ballot of the first general secret election under the
Stalinist Constitution — a ballot with the name of the
Constitution’s creator.

This mood would have captured the suspense surrounding the
reelections of Karimov, who appears an apt pupil of Stalin when it
comes to repression and political control and seems to organize
elections that compete with those of Stalin in their surrealism.

Under Karimov, Uzbekistan is a country with very extractive
political and economic institutions. And it is poor. Probably one-third
of the people live in poverty, and the average annual income is
around $1,000. Not all the development indicators are bad. According
to World Bank data, school enrollment is 100 percent ... well, except
possibly during the cotton picking season. Literacy is also very high,
though apart from controlling all the media, the regime also bans
books and censors the Internet. While most people are paid only a
few cents a day to pick cotton, the Karimov family and former

communist cadres who reinvented themselves after 1989 as the new
economic and political elites of Uzbekistan have become fabulously
wealthy.

The family economic interests are run by Karimov’s daughter
Gulnora, who is expected to succeed her father as president. In a
country so untransparent and secretive, nobody knows exactly what
the Karimov family controls or how much money they earn, but the
experience of the U.S. company Interspan is indicative of what has
happened in the Uzbek economy in the last two decades. Cotton is not
the only agricultural crop; parts of the country are ideal for growing
tea, and Interspan decided to invest. By 2005 it had taken over 30
percent of the local market, but then it ran into trouble. Gulnora
decided that the tea industry looked economically promising. Soon
Interspan’s local personnel started to be arrested, beaten up, and
tortured. It became impossible to operate, and by August 2006 the
company had pulled out. Its assets were taken over by the Karimov
families’ rapidly expanding tea interests, at the time representing 67
percent of the market, up from 2 percent a couple of years earlier.

Uzbekistan in many ways looks like a relic from the past, a
forgotten age. It is a country languishing under the absolutism of a
single family and the cronies surrounding them, with an economy
based on forced labor — in fact, the forced labor of children. Except
that it isn’t. It’s part of the current mosaic of societies failing under
extractive institutions, and unfortunately it has many commonalities
with other former Soviet Socialist Republics, ranging from Armenia
and Azerbaijan to Kyrgyzstan, Tajikistan, and Turkmenistan, and
reminds us that even in the twenty-first century, extractive economic
and political institutions can take an unashamed atrociously
extractive form.

Keeping the Playing Field at an Angle

The 1990s were a period of reform in Egypt. Since the military coup
that removed the monarchy in 1954, Egypt had been run as a quasi-
socialist society in which the government played a central role in the

economy. Many sectors of the economy were dominated by state-
owned enterprises. Over the years, the rhetoric of socialism lapsed,
markets opened, and the private sector developed. Yet these were not
inclusive markets, but markets controlled by the state and by a
handful of businessmen allied with the National Democratic Party
(NDP), the political party founded by President Anwar Sadat in 1978.
Businessmen became more and more involved with the party, and the
party became more and more involved with them under the
government of Hosni Mubarak. Mubarak, who became president in
1981 following Anwar Sadat’s assassination, ruled with the NDP until
being forced from power by popular protests and the military in
February 2011, as we discussed in the Preface (this page).

Major businesspeople were appointed to key government posts in
areas closely related to their economic interests. Rasheed Mohamed
Rasheed, former president of Unilever AMET (Africa, Middle East,
and Turkey), became minister of foreign trade and industry;
Mohamed Zoheir Wahid Garana, the owner and managing director of
Garana Travel Company, one of the largest in Egypt, became minister
of tourism; Amin Ahmed Mohamed Osman Abaza, founder of the Nile
Cotton Trade Company, the largest cotton-exporting company in
Egypt, became minister of agriculture.

In many sectors of the economy, businessmen persuaded the
government to restrict entry through state regulation. These sectors
included the media, iron and steel, the automotive industry, alcoholic
beverages, and cement. Each sector was very concentrated with high
entry barriers protecting the politically connected businessmen and
firms. Big businessmen close to the regime, such as Ahmed Ezz (iron
and steel), the Sawiris family (multimedia, beverages, and
telecommunications), and Mohamed Nosseir (beverages and
telecommunications) received not only protection from the state but
also government contracts and large bank loans without needing to
put up collateral. Ahmed Ezz was both the chairman of Ezz Steel, the
largest company in the country’s steel industry, producing 70 percent
of Egypt’s steel, and also a high-ranking member of the NDP, the
chairman of the People’s Assembly Budget and Planning Committee,

and a close associate of Gamal Mubarak, one of President Mubarak’s
sons.

The economic reforms of the 1990s promoted by international
financial institutions and economists were aimed at freeing up
markets and reducing the role of the state in the economy. A key
pillar of such reforms everywhere was the privatization of state-
owned assets. Mexican privatization (this page-this page), instead of
increasing competition, simply turned state-owned monopolies into
privately owned monopolies, in the process enriching politically
connected businessmen such as Carlos Slim. Exactly the same thing
took place in Egypt. The businesspeople connected to the regime were
able to heavily influence implementation of Egypt’s privatization
program so that it favored the wealthy business elite — or the
“whales,” as they are known locally. At the time that privatization
began, the economy was dominated by thirty-two of these whales.

One was Ahmed Zayat, at the helm of the Luxor Group. In 1996 the
government decided to privatize A1 Ahram beverages (ABC), which
was the monopoly maker of beer in Egypt. A bid came in from a
consortium of the Egyptian Finance Company, led by real estate
developer Farid Saad, along with the first venture capital company
formed in Egypt in 1995. The consortium included Fouad Sultan,
former minister of tourism, Mohamed Nosseir, and Mohamed Ragab,
another elite businessman. The group was well connected, but not
well connected enough. Its bid of 400 million Egyptian pounds was
turned down as too low. Zayat was better connected. He didn’t have
the money to purchase ABC, so he came up with a scheme of Carlos
Slim-type ingenuity. ABC shares were floated for the first time on the
London Stock Exchange, and the Luxor Group acquired 74.9 percent
of those shares at 68.5 Egyptian pounds per share. Three months later
the shares were then split in two, and the Luxor Group was able to
sell all of them at 52.5 pounds each, netting a 36 percent profit, with
which Zayat was able to fund the purchase of ABC for 231 million
pounds the next month. At the time, ABC was making an annual
profit of around 41.3 million Egyptian pounds and had cash reserves
of 93 million Egyptian pounds. It was quite a bargain. In 1999 the

newly privatized ABC extended its monopoly from beer into wine by
buying the privatized national wine monopoly Gianaclis. Gianaclis
was a very profitable company, nestling behind a 3,000 percent tariff
imposed on imported wines, and it had a 70 percent profit margin on
what it sold. In 2002 the monopoly changed hands again when Zayat
sold ABC to Heineken for 1.3 billion Egyptian pounds. A 563 percent
profit in five years.

Mohamed Nosseir hadn’t always been on the losing side. In 1993 he
purchased the privatized El Nasr Bottling Company, which had the
monopoly rights to bottle and sell Coca-Cola in Egypt. Nosseir’s
relations with the then-minister of the public business sector, Atef
Ebeid, allowed him to make the purchase with little competition.
Nosseir then sold the company after two years for more than three
times the acquisition price. Another example was the move in the late
1990s to involve the private sector in the state cinema industry.
Again political connections implied that only two families were
allowed to bid for and operate the cinemas — one of whom was the
Sawiris family.

Egypt today is a poor nation — not as poor as most countries to the
south, in sub-Saharan Africa, but still one where around 40 percent of
the population is very poor and lives on less than two dollars a day.
Ironically, as we saw earlier (this page-this page), in the nineteenth
century Egypt was the site of an initially successful attempt at
institutional change and economic modernization under Muhammad
Ali, who did generate a period of extractive economic growth before
it was effectively annexed to the British Empire. From the British
colonial period a set of extractive institutions emerged, and were
continued by the military after 1954. There was some economic
growth and investment in education, but the majority of the
population had few economic opportunities, while the new elite could
benefit from their connections to the government.

These extractive economic institutions were again supported by
extractive political institutions. President Mubarak planned to begin a
political dynasty, grooming his son Gamal to replace him. His plan
was cut short only by the collapse of his extractive regime in early

2011 in the face of widespread unrest and demonstrations during the
so-called Arab Spring. During the period when Nasser was president,
there were some inclusive aspects of economic institutions, and the
state did open up the education system and provide some
opportunities that the previous regime of King Farouk had not. But
this was an example of an unstable combination of extractive political
institutions with some inclusivity of economic institutions.

The inevitable outcome, which came during Mubarak’s reign, was
that economic institutions became more extractive, reflecting the
distribution of political power in society. In some sense the Arab
Spring was a reaction to this. This was true not just in Egypt but also
in Tunisia. Three decades of Tunisian growth under extractive
political institutions started to go into reverse as President Ben Ali
and his family began to prey more and more on the economy.

Why Nations Fail

Nations fail economically because of extractive institutions. These
institutions keep poor countries poor and prevent them from
embarking on a path to economic growth. This is true today in Africa,
in places such as Zimbabwe and Sierra Leone; in South America, in
countries such as Colombia and Argentina; in Asia, in countries such
as North Korea and Uzbekistan; and in the Middle East, in nations
such as Egypt. There are notable differences among these countries.
Some are tropical, some are in temperate latitudes. Some were
colonies of Britain; others, of Japan, Spain, and Russia. They have
very different histories, languages, and cultures. What they all share
is extractive institutions. In all these cases the basis of these
institutions is an elite who design economic institutions in order to
enrich themselves and perpetuate their power at the expense of the
vast majority of people in society. The different histories and social
structures of the countries lead to the differences in the nature of the
elites and in the details of the extractive institutions. But the reason
why these extractive institutions persist is always related to the
vicious circle, and the implications of these institutions in terms of

impoverishing their citizens are similar — even if their intensity
differs.

In Zimbabwe, for example, the elite comprise Robert Mugabe and
the core of ZANU-PF, who spearheaded the anticolonial fight in the
1970s. In North Korea, they are the clique around Kim Jong-Il and the
Communist Party. In Uzbekistan it is President Islam Karimov, his
family, and his reinvented Soviet Union-era cronies. These groups are
obviously very different, and these differences, along with the
variegated polities and economies they govern, mean that the specific
form the extractive institutions take differs. For instance, because
North Korea was created by a communist revolution, it takes as its
political model the one-party rule of the Communist Party. Though
Mugabe did invite the North Korean military into Zimbabwe in the
1980s to massacre his opponents in Matabeleland, such a model for
extractive political institutions is not applicable in Zimbabwe.
Instead, because of the way he came to power in the anticolonial
struggle, Mugabe had to cloak his rule with elections, even if for a
while he managed actually to engineer a constitutionally sanctified
one-party state.

In contrast, Colombia has had a long history of elections, which
emerged historically as a method for sharing power between the
Liberal and Conservative parties in the wake of independence from
Spain. Not only is the nature of elites different, but their numbers are.
In Uzbekistan, Karimov could hijack the remnants of the Soviet state,
which gave him a strong apparatus to suppress and murder
alternative elites. In Colombia, the lack of authority of the central
state in parts of the country has naturally led to much more
fragmented elites — in fact, so much so that they sometimes murder
one another. Nevertheless, despite these variegated elites and political
institutions, these institutions often manage to cement and reproduce
the power of the elite that created them. But sometimes the infighting
they induce leads to the collapse of the state, as in Sierra Leone.

Just as different histories and structures mean that the identity of
elites and the details of extractive political institutions differ, so do
the details of the extractive economic institutions that the elites set

up. In North Korea, the tools of extraction were again inherited from
the communist toolkit: the abolition of private property, state-run
farms, and industry.

In Egypt, the situation was quite similar under the avowedly
socialist military regime created by Colonel Nasser after 1952. Nasser
sided with the Soviet Union in the cold war, expropriating foreign
investments, such as the British-owned Suez Canal, and took into
public ownership much of the economy. However, the situation in
Egypt in the 1950s and ’60s was very different from that in North
Korea in the 1940s. It was much easier for the North Koreans to
create a more radically communist-style economy, since they could
expropriate former Japanese assets and build on the economic model
of the Chinese Revolution.

In contrast, the Egyptian Revolution was more a coup by a group of
military officers. When Egypt changed sides in the cold war and
became pro-Western, it was therefore relatively easy, as well as
expedient, for the Egyptian military to change from central command
to crony capitalism as a method of extraction. Even so, the better
economic performance of Egypt compared with North Korea was a
consequence of the more limited extractive nature of Egyptian
institutions. For one thing, lacking the stifling control of the North
Korean Communist Party, the Egyptian regime had to placate its
population in a way that the North Korean regime does not. For
another, even crony capitalism generates some incentives for
investment, at least among those favored by the regime, that are
totally absent in North Korea.

Though these details are all important and interesting, the more
critical lessons are in the big picture, which reveals that in each of
these cases, extractive political institutions have created extractive
economic institutions, transferring wealth and power toward the elite.

The intensity of extraction in these different countries obviously
varies and has important consequences for prosperity. In Argentina,
for example, the constitution and democratic elections do not work
well to promote pluralism, but they do function much better than in
Colombia. At least the state can claim the monopoly of violence in

Argentina. Partly as a consequence, income per capita in Argentina is
double that of Colombia. The political institutions of both countries
do a much better job of restraining elites than those in Zimbabwe and
Sierra Leone, and as a result, Zimbabwe and Sierra Leone are much
poorer than Argentina and Colombia.

The vicious circle also implies that even when extractive
institutions lead to the collapse of the state, as in Sierra Leone and
Zimbabwe, this doesn’t put a conclusive end to the rule of these
institutions. We have already seen that civil wars and revolutions,
while they may occur during critical junctures, do not necessarily
lead to institutional change. The events in Sierra Leone since the civil
war ended in 2002 vividly illustrate this possibility.

In 2007 in a democratic election, the old party of Siaka Stevens, the
APC, returned to power. Though the man who won the presidential
election, Ernest Bai Koroma, had no association with the old APC
governments, many of his cabinet did. Two of Stevens’s sons,
Bockarie and Jengo, were even made ambassadors to the United
States and Germany. In a sense this is a more volatile version of what
we saw happen in Colombia. There the lack of state authority in
many parts of the country persists over time because it is in the
interests of part of the national political elite to allow it to do so, but
the core state institutions are also strong enough to prevent this
disorder from turning into complete chaos. In Sierra Leone, partly
because of the more extractive nature of economic institutions and
partly because of the country’s history of highly extractive political
institutions, the society has not only suffered economically but has
also tipped between complete disorder and some sort of order. Still,
the long-run effect is the same: the state all but remains absent, and
institutions are extractive.

In all these cases there has been a long history of extractive
institutions since at least the nineteenth century. Each country is
trapped in a vicious circle. In Colombia and Argentina, they are
rooted in the institutions of Spanish colonial rule (this page-this
page). Zimbabwe and Sierra Leone originated in British colonial
regimes set up in the late nineteenth century. In Sierra Leone, in the

absence of white settlers, these regimes built extensively on
precolonial extractive structures of political power and intensified
them. These structures themselves were the outcome of a long vicious
circle that featured lack of political centralization and the disastrous
effects of the slave trade. In Zimbabwe, there was much more of a
construction of a new form of extractive institutions, because the
British South Africa Company created a dual economy. Uzbekistan
could take over the extractive institutions of the Soviet Union and,
like Egypt, modify them into crony capitalism. The Soviet Union’s
extractive institutions themselves were in many ways a continuation
of those of the tsarist regime, again in a pattern predicated on the
iron law of oligarchy. As these various vicious circles played out in
different parts of the world over the past 250 years, world inequality
emerged, and persists.

The solution to the economic and political failure of nations today
is to transform their extractive institutions toward inclusive ones. The
vicious circle means that this is not easy. But it is not impossible, and
the iron law of oligarchy is not inevitable. Either some preexisting
inclusive elements in institutions, or the presence of broad coalitions
leading the fight against the existing regime, or just the contingent
nature of history, can break vicious circles. Just like the civil war in
Sierra Leone, the Glorious Revolution in 1688 was a struggle for
power. But it was a struggle of a very different nature than the civil
war in Sierra Leone. Conceivably some in Parliament fighting to
remove James II in the wake of the Glorious Revolution imagined
themselves playing the role of the new absolutist, as Oliver Cromwell
did after the English Civil War. But the fact that Parliament was
already powerful and made up of a broad coalition consisting of
different economic interests and different points of view made the
iron law of oligarchy less likely to apply in 1688. And it was helped
by the fact that luck was on the side of Parliament against James II.
In the next chapter, we will see other examples of countries that have
managed to break the mold and transform their institutions for the
better, even after a long history of extractive institutions.

14 .

BREAKING THE MOLD

Three African Chiefs

On September 6, 1895, the ocean liner Tantallon Castle docked at

Plymouth on the southern coast of England. Three African chiefs,
Khama of the Ngwato, Bathoen of the Ngwaketse, and Sebele of the
Kwena, disembarked and took the 8:10 express train to Paddington
Station, London. The three chiefs had come to Britain on a mission: to
save their and five other Tswana states from Cecil Rhodes. The
Ngwato, Ngwaketse, and Kwena were three of the eight Tswana states
comprising what was then known as Bechuanaland, which would
become Botswana after independence in 1966.

The tribes had been trading with Europeans for most of the
nineteenth century. In the 1840s, the famous Scottish missionary
David Livingstone had traveled extensively in Bechuanaland and
converted King Sechele of the Kwena to Christianity. The first
translation of the Bible into an African language was in Setswana, the
language of the Tswana. In 1885 Britain had declared Bechuanaland a
protectorate. The Tswana were content with the arrangement, as they
thought this would bring them protection from further European
invasions, particularly from the Boers, with whom they had been
clashing since the Great Trek in 1835, a migration of thousands of
Boers into the interior to escape from British colonialism. The British,
on the other hand, wanted control of the area to block both further
expansions by the Boers (this page-this page) and possible expansions
by Germans, who had annexed the area of southwest Africa
corresponding to today’s Namibia. The British did not think that a
full-scale colonization was worthwhile. The high commissioner Rey

summarized the attitudes of the British government in 1885 clearly:
“We have no interest in the country to the north of the Molope [the
Bechuanaland protectorate], except as a road to the interior; we
might therefore confine ourselves for the present to preventing that
part of the Protectorate being occupied by either filibusters or foreign
powers doing as little in the way of administration or settlement as
possible.”

But things changed for the Tswana in 1889 when Cecil Rhodes’s
British South Africa Company started expanding north out of South
Africa, expropriating great swaths of land that would eventually
become Northern and Southern Rhodesia, now Zambia and
Zimbabwe. By 1895, the year of the three chiefs’ visit to London,
Rhodes had his eye on territories to the southwest of Rhodesia,
Bechuanaland. The chiefs knew that only disaster and exploitation lay
ahead for territories if they fell under the control of Rhodes. Though
it was impossible for them to defeat Rhodes militarily, they were
determined to fight him any way they could. They decided to opt for
the lesser of two evils: greater control by the British rather than
annexation by Rhodes. With the help of the London Missionary
Society, they traveled to London to try to persuade Queen Victoria
and Joseph Chamberlain, then colonial secretary, to take greater
control of Bechuanaland and protect it from Rhodes.

On September 11, 1895, they had their first meeting with
Chamberlain. Sebele spoke first, then Bathoen, and finally Khama.
Chamberlain declared that he would consider imposing British control
to protect the tribes from Rhodes. In the meantime, the chiefs quickly
embarked on a nationwide speaking tour to drum up popular support
for their requests. They visited and spoke at Windsor and Reading,
close to London; in Southampton on the south coast; and in Leicester
and Birmingham, in Chamberlain’s political support base, the
Midlands. They went north to industrial Yorkshire, to Sheffield,
Leeds, Halifax, and Bradford; they also went west to Bristol and then
up to Manchester and Liverpool.

Meanwhile, back in South Africa, Cecil Rhodes was making
preparations for what would become the disastrous Jameson Raid, an

armed assault on the Boer Republic of the Transvaal, despite
Chamberlain’s strong objections. These events likely made
Chamberlain much more sympathetic to the chiefs’ plight than he
might have been otherwise. On November 6, they met with him again
in London. The chiefs spoke through an interpreter:

Chamberlain: I will speak about the lands of the Chiefs,
and about the railway, and about the law which is to be
observed in the territory of the Chiefs ... Now let us look
at the map ... We will take the land that we want for the
railway, and no more.

Khama: I say, that if Mr. Chamberlain will take the land
himself, I will be content.

Chamberlain: Then tell him that I will make the railway
myself by the eyes of one whom I will send and I will take
only as much as I require, and will give compensation if
what I take is of value.

Khama: I would like to know how [i.e., where] the
railway will go.

Chamberlain: It shall go through his territory but shall be
fenced in, and we will take no land.

Khama: I trust that you will do this work as for myself,
and treat me fairly in this matter.

Chamberlain: I will guard your interests.

The next day, Edward Fairfield, at the Colonial Office, explained
Chamberlain’s settlement in more detail:

Each of the three chiefs, Khama, Sebele and Bathoen, shall
have a country within which they shall live as hitherto
under the protection of the Queen. The Queen shall
appoint an officer to reside with them. The chiefs will rule
their own people much as at present.

Rhodes’s reaction to being outmaneuvered by the three African
chiefs was predictable. He cabled to one of his employees, saying, “I

do object to being beaten by three canting natives.”

The chiefs in fact had something valuable that they had protected
from Rhodes and would subsequently protect from British indirect
rule. By the nineteenth century, the Tswana states had developed a
core set of political institutions. These involved both an unusual
degree, by sub-Saharan African standards, of political centralization
and collective decision-making procedures that can even be viewed as
a nascent, primitive form of pluralism. Just as the Magna Carta
enabled the participation of barons into the political decision-making
process and put some restrictions on the actions of the English
monarchs, the political institutions of the Tswana, in particular the
kgotla, also encouraged political participation and constrained chiefs.
The South African anthropologist Isaac Schapera describes how the
kgotla worked as follows:

all matters of tribal policy are dealt with finally before a
general assembly of the adult males in the chiefs kgotla
(council place). Such meetings are very frequently
held ... among the topics discussed ... are tribal disputes,
quarrels between the chief and his relatives, the
imposition of new levies, the undertaking of new public
works, the promulgation of new decrees by the chief ... it
is not unknown for the tribal assembly to overrule the
wishes of the chief. Since anyone may speak, these
meetings enable him to ascertain the feelings of the people
generally, and provide the latter with an opportunity of
stating their grievances. If the occasion calls for it, he and
his advisers may be taken severely to task, for the people
are seldom afraid to speak openly and frankly.

Beyond the kgotla, the Tswana chieftaincy was not strictly
hereditary but open to any man demonstrating significant talent and
ability. Anthropologist John Comaroff studied in detail the political
history of another of the Tswana states, the Rolong. He showed that
though in appearance the Tswana had clear rules stipulating how the

chieftancy was to be inherited, in practice these rules were
interpreted to remove bad rulers and allow talented candidates to
become chief. He showed that winning the chieftancy was a matter of
achievement, but was then rationalized so that the successful
competitor appeared to be the rightful heir. The Tswana captured this
idea with a proverb, with a tinge of constitutional monarchy: kgosi ke
kgosi ka morafe, “The king is king by the grace of the people.”

The Tswana chiefs continued in their attempts to maintain their
independence from Britain and preserve their indigenous institutions
after their trip to London. They conceded the construction of railways
in Bechuanaland, but limited the intervention of the British in other
aspects of economic and political life. They were not opposed to the
construction of the railways, certainly not for the same reasons as the
Austro-Hungarian and Russian monarchs blocked railways. They just
realized that railways, like the rest of the policies of the British,
would not bring development to Bechuanaland as long as it was
under colonial control. The early experience of Quett Masire,
president of independent Botswana from 1980 to 1998, explains why.
Masire was an enterprising farmer in the 1950s; he developed new
cultivation techniques for sorghum and found a potential customer in
Vryburg Milling, a company located across the border in South Africa.
He went to the railway station master at Lobatse in Bechuanaland and
asked to rent two rail trucks to move his crop to Vryburg. The station
master refused. Then he got a white friend to intervene. The station
master reluctantly agreed, but quoted Masire four times the rate for
whites. Masire gave up and concluded, “It was the practice of the
whites, not just the laws prohibiting Africans from owning freehold
land or holding trading licenses that kept blacks from developing
enterprises in Bechuanaland.”

All in all, the chiefs, and the Tswana people, had been lucky.
Perhaps against all odds, they succeeded in preventing Rhodes’s
takeover. As Bechuanaland was still marginal for the British, the
establishment of indirect rule there did not create the type of vicious
circle playing out in Sierra Leone (this page-this page). They also
avoided the kind of colonial expansion that went on in the interior of

South Africa that would turn those lands into reservoirs of cheap
labor for white miners or farmers. The early stages of the process of
colonization are a critical juncture for most societies, a crucial period
during which events that will have important long-term consequences
for their economic and political development transpire. As we
discussed in chapter 9, most societies in sub-Saharan Africa, just as
those in South America and South Asia, witnessed the establishment
or intensification of extractive institutions during colonization. The
Tswana would instead avoid both intense indirect rule and the far
worse fate that would have befallen them had Rhodes succeeded in
annexing their lands. This was not just blind luck, however. It was
once again a result of the interplay between the existing institutions,
shaped by the institutional drift of the Tswana people, and the critical
juncture brought about by colonialism. The three chiefs had made
their own luck by taking the initiative and traveling to London, and
they were able to do this because they had an unusual degree of
authority, compared with other tribal leaders in sub-Saharan Africa,
owing to the political centralization the Tswana tribes had achieved,
and perhaps they also had an unusual degree of legitimacy, because
of the modicum of pluralism embedded in their tribal institutions.

Another critical juncture at the end of the colonial period would be
more central to the success of Botswana, enabling it to develop
inclusive institutions. By the time Bechuanaland became independent
in 1966 under the name Botswana, the lucky success of chiefs Sebele,
Bathoen, and Khama was long in the past. In the intervening years,
the British invested little in Bechuanaland. At independence,
Botswana was one of the poorest countries in the world; it had a total
of twelve kilometers of paved roads, twenty-two citizens who had
graduated from university, and one hundred from secondary school.
To top it all off, it was almost completely surrounded by the white
regimes of South Africa, Namibia, and Rhodesia, all of which were
hostile to independent African countries run by blacks. It would have
been on few people’s list of countries most likely to succeed. Yet over
the next forty-five years, Botswana would become one of the fastest-
growing countries in the world. Today Botswana has the highest per

capita income in sub-Saharan Africa, and is at the same level as
successful Eastern European countries such as Estonia and Hungary,
and the most successful Latin American nations, such as Costa Rica.

How did Botswana break the mold? By quickly developing inclusive
economic and political institutions after independence. Since then, it
has been democratic, holds regular and competitive elections, and has
never experienced civil war or military intervention. The government
set up economic institutions enforcing property rights, ensuring
macroeconomic stability, and encouraging the development of an
inclusive market economy. But of course, the more challenging
question is, how did Botswana manage to establish a stable
democracy and pluralistic institutions, and choose inclusive economic
institutions, while most other African countries did the opposite? To
answer this, we have to understand how a critical juncture, this time
the end of colonial rule, interacted with Botswana’s existing
institutions.

In most of sub-Saharan Africa — for example, for Sierra Leone and
Zimbabwe — independence was an opportunity missed, accompanied
by the re-creation of the same type of extractive institutions that
existed during the colonial period. Early stages of independence
would play out very differently in Botswana, again largely because of
the background created by Tswana historical institutions. In this,
Botswana exhibited many parallels to England on the verge of the
Glorious Revolution. England had achieved rapid political
centralization under the Tudors and had the Magna Carta and the
tradition of Parliament that could at least aspire to constrain
monarchs and ensure some degree of pluralism. Botswana also had
some amount of state centralization and relatively pluralistic tribal
institutions that survived colonialism. England had a newly forming
broad coalition, consisting of Atlantic traders, industrialists, and the
commercially minded gentry, that was in favor of well-enforced
property rights. Botswana had its coalition in favor of secure
procedure rights, the Tswana chiefs, and elites who owned the major
assets in the economy, cattle. Even though land was held
communally, cattle was private property in the Tswana states, and the

elites were similarly in favor of well-enforced property rights. All this
of course is not denying the contingent path of history. Things would
have turned out very differently in England if parliamentary leaders
and the new monarch had attempted to use the Glorious Revolution
to usurp power. Similarly, things could have turned out very
differently in Botswana, especially if it hadn’t been so fortunate as to
have leaders such as Seretse Khama, or Quett Masire, who decided to
contest power in elections rather than subvert the electoral system, as
many postindependence leaders in sub-Saharan Africa did.

At independence the Tswana emerged with a history of institutions
enshrining limited chieftaincy and some degree of accountability of
chiefs to the people. The Tswana were of course not unique in Africa
for having institutions like this, but they were unique in the extent to
which these institutions survived the colonial period unscathed.
British rule had been all but absent. Bechuanaland was administered
from Mafeking, in South Africa, and it was only during the transition
to independence in the 1960s that the plans for the capital of
Gaborone were laid out. The capital and the new structures there
were not meant to expunge the indigenous institutions, but to build
on them; as Gaborone was constructed, new kgotlas were planned
along with it.

Independence was also a relatively orderly affair. The drive for
independence was led by the Botswana Democratic Party (BDP),
founded in 1960 by Quett Masire and Seretse Khama. Khama was the
grandson of King Khama III; his given name, Seretse, means “the clay
that binds together.” It was to be an extraordinarily apt name. Khama
was the hereditary chief of the Ngwato, and most of the Tswana
chiefs and elites joined the Botswana Democratic Party. Botswana
didn’t have a marketing board, because the British had been so
uninterested in the colony. The BDP quickly set one up in 1967, the
Botswana Meat Commission. But instead of expropriating the ranchers
and cattle owners, the Meat Commission played a central role in
developing the cattle economy; it put up fences to control foot-and-
mouth disease and promoted exports, which would both contribute to
economic development and increase the support for inclusive

economic institutions.

Though the early growth in Botswana relied on meat exports,
things changed dramatically when diamonds were discovered. The
management of natural resources in Botswana also differed markedly
from that in other African nations. During the colonial period, the
Tswana chiefs had attempted to block prospecting for minerals in
Bechuanaland because they knew that if Europeans discovered
precious metals or stones, their autonomy would be over. The first big
diamond discovery was under Ngwato land, Seretse Khama’s
traditional homeland. Before the discovery was announced, Khama
instigated a change in the law so that all subsoil mineral rights were
vested in the nation, not the tribe. This ensured that diamond wealth
would not create great inequities in Botswana. It also gave further
impetus to the process of state centralization as diamond revenues
could now be used for building a state bureaucracy and infrastructure
and for investing in education. In Sierra Leone and many other sub-
Saharan African nations, diamonds fueled conflict between different
groups and helped to sustain civil wars, earning the label Blood
Diamonds for the carnage brought about by the wars fought over
their control. In Botswana, diamond revenues were managed for the
good of the nation.

The change in subsoil mineral rights was not the only policy of
state building that Seretse Khama’s government implemented.
Ultimately, the Chieftaincy Act of 1965 passed by the legislative
assembly prior to independence, and the Chieftaincy Amendment Act
of 1970 would continue the process of political centralization,
enshrining the power of the state and the elected president by
removing from chiefs the right to allocate land and enabling the
president to remove a chief from office if necessary. Another facet of
political centralization was the effort to unify the country further, for
example, with legislation ensuring that only Setswana and English
were to be taught in school. Today Botswana looks like a homogenous
country, without the ethnic and linguistic fragmentation associated
with many other African nations. But this was an outcome of the
policy to have only English and a single national language, Setswana,

taught in schools to minimize conflict between different tribes and
groups within society. The last census to ask questions about ethnicity
was the one taken in 1946, which revealed considerable
heterogeneity in Botswana. In the Ngwato reserve, for example, only
20 percent of the population identified themselves as pure Ngwato;
though there were other Tswana tribes present, there were also many
non-Tswana groups whose first language was not Setswana. This
underlying heterogeneity has been modulated both by the policies of
the postindependence government and by the relatively inclusive
institutions of the Tswana tribes in the same way as heterogeneity in
Britain, for example, between the English and the Welsh, has been
modulated by the British state. The Botswanan state did the same.
Since independence, the census in Botswana has never asked about
ethnic heterogeneity, because in Botswana everyone is Tswana.

Botswana achieved remarkable growth rates after independence
because Seretse Khama, Quett Masire, and the Botswana Democratic
Party led Botswana onto a path of inclusive economic and political
institutions. When the diamonds came on stream in the 1970s, they
did not lead to civil war, but provided a strong fiscal base for the
government, which would use the revenues to invest in public
services. There was much less incentive to challenge or overthrow the
government and control the state. Inclusive political institutions bred
political stability and supported inclusive economic institutions. In a
pattern familiar from the virtuous circle described in chapter 11,
inclusive economic institutions increased the viability and durability
of inclusive political institutions.

Botswana broke the mold because it was able to seize a critical
juncture, postcolonial independence, and set up inclusive institutions.
The Botswana Democratic Party and the traditional elites, including
Khama himself, did not try to form a dictatorial regime or set up
extractive institutions that might have enriched them at the expense
of society. This was once again an outcome of the interplay between a
critical juncture and existing institutions. As we have seen, differently
from almost anywhere else in sub-Saharan Africa, Botswana already
had tribal institutions that had achieved some amount of centralized

authority and contained important pluralistic features. Moreover, the
country had economic elites who themselves had much to gain from
secure property rights.

No less important, the contingent path of history worked in
Botswana’s favor. It was particularly lucky because Seretse Khama
and Quett Masire were not Siaka Stevens and Robert Mugabe. The
former worked hard and honestly to build inclusive institutions on
the foundations of the Tswanas’ tribal institutions. All this made it
more likely that Botswana would succeed in taking a path toward
inclusive institutions, whereas much of the rest of sub-Saharan Africa
did not even try, or failed outright.

The End of the Southern Extraction

It was December 1, 1955. The city of Montgomery, Alabama, arrest
warrant lists the time that the offense occurred as 6:06 p.m. James
Blake, a bus driver, was having trouble, he called the police, and
Officers Day and Mixon arrived on the scene. They noted in their
report:

We received a call upon arrival the bus operator said he
had a colored female sitting in the white section of the
bus, and would not move back. We ... also saw her. The
bus operator signed a warrant for her. Rosa Parks (cf) was
charged with chapter 6 section 1 1 of the Montgomery City
Code.

Rosa Parks’s offense was to sit in a section of the Cleveland Avenue
bus reserved for whites, a crime under Alabama’s Jim Crow laws.
Parks was fined ten dollars in addition to court fees of four dollars.
Rosa Parks wasn’t just anybody. She was already the secretary of the
Montgomery chapter of the National Association for the Advancement
of Colored People, the NAACP, which had long been struggling to
change the institutions of the U.S. South. Her arrest triggered a mass
movement, the Montgomery Bus Boycott, masterminded by Martin

Luther King, Jr. By December 3, King and other black leaders had
organized a coordinated bus boycott, convincing all black people that
they should not ride on any bus in Montgomery. The boycott was
successful and it lasted until December 20, 1956. It set in motion a
process that culminated in the U.S. Supreme Court ruling that the
laws that segregated buses in Alabama and Montgomery were
unconstitutional.

The Montgomery Bus Boycott was a key moment in the civil rights
movement in the U.S. South. This movement was part of a series of
events and changes that finally broke the mold in the South and led
to a fundamental change of institutions. As we saw in chapter 12,
after the Civil War, southern landowning elites had managed to re-
create the extractive economic and political institutions that had
dominated the South before the Civil War. Though the details of these
institutions changed — for example, slavery was no longer possible —
the negative impact on economic incentives and prosperity in the
South was the same. The South was notably poorer than the rest of
the United States.

Starting in the 1950s, southern institutions would begin to move
the region onto a much faster growth trajectory. The type of
extractive institutions ultimately eliminated in the U.S. South were
different from the colonial institutions of pre-independence Botswana.
The type of critical juncture that started the process of their downfall
was also different but shared several commonalities. Starting in the
1940s, those who bore the brunt of the discrimination and the
extractive institutions in the South, people such as Rosa Parks, started
to become much better organized in their fight against them. At the
same time, the U.S. Supreme Court and the federal government finally
began to intervene systematically to reform the extractive institutions
in the South. Thus a main factor creating a critical juncture for
change in the South was the empowerment of black Americans there
and the end of the unchallenged domination of the southern elites.

The southern political institutions, both before the Civil War and
after, had a clear economic logic, not too different from the South
African Apartheid regime: to secure cheap labor for the plantations.

But by the 1950s, this logic became less compelling. For one,
significant mass outmigration of blacks from the South was already
under way, a legacy of both the Great Depression and the Second
World War. In the 1940s and ’50s, this reached an average of a
hundred thousand people per year. Meanwhile, technological
innovation in agriculture, though adopted only slowly, was reducing
the dependence of the plantation owners on cheap labor. Most labor
in the plantations was used for picking cotton. In 1950 almost all
southern cotton was still picked by hand. But the mechanization of
cotton picking was reducing the demand for this type of work. By
1960, in the key states of Alabama, Louisiana, and Mississippi, almost
half of production had become mechanized. Just as blacks became
harder to trap in the South, they also became no longer indispensable
for the plantation owners. There was thus less reason for elites to
fight vigorously to maintain the old extractive economic institutions.
This did not mean that they would accept the changes in institutions
willingly, however. Instead, a protracted conflict ensued. An unusual
coalition, between southern blacks and the inclusive federal
institutions of the United States, created a powerful force away from
southern extraction and toward equal political and civil rights for
southern blacks, which would finally remove the significant barriers
to economic growth in the U.S. South.

The most important impetus for change came from the civil rights
movement. It was the empowerment of blacks in the South that led
the way, as in Montgomery, by challenging extractive institutions
around them, by demanding their rights, and by protesting and
mobilizing in order to obtain them. But they weren’t alone in this,
because the U.S. South was not a separate country and the southern
elites did not have free rein as did Guatemalan elites, for example. As
part of the United States of America, the South was subject to the U.S.
Constitution and federal legislation. The cause for fundamental
reform in the South would finally receive support from the U.S.
executive, legislature, and Supreme Court partly because the civil
rights movement was able to have its voice heard outside the South,
thereby mobilizing the federal government.

Federal intervention to change the institutions in the South started
with the decision of the Supreme Court in 1944 that primary elections
where only white people could stand were unconstitutional. As we
have seen, blacks had been politically disenfranchised in the 1890s
with the use of poll taxes and literacy tests (this page-this page).
These tests were routinely manipulated to discriminate against black
people, while still allowing poor and illiterate whites to vote. In a
famous example from the early 1960s, in Louisiana a white applicant
was judged literate after giving the answer “FRDUM FOOF SPETGH”
to a question about the state constitution. The Supreme Court
decision in 1944 was the opening salvo in the longer battle to open
up the political system to blacks, and the Court understood the
importance of loosening white control of political parties.

That decision was followed by Brown v. Board of Education in 1954,
in which the Supreme Court ruled that state-mandated segregation of
schools and other public sites was unconstitutional. In 1962 the Court
knocked away another pillar of the political dominance of white
elites: legislative malapportionment. When a legislature is
malapportioned — as were the “rotten boroughs” in England before the
First Reform Act — some areas or regions receive much greater
representation than they should based on their share of the relevant
population. Malapportionment in the South meant that the rural
areas, the heartland of the southern planter elite, were heavily
overrepresented relative to urban areas. The Supreme Court put an
end to this in 1962 with its decision in the Baker v. Carr case, which
introduced the “one-person, one-vote” standard.

But all the rulings from the Supreme Court would have amounted
to little if they hadn’t been implemented. In the 1890s, in fact, federal
legislation enfranchising southern blacks was not implemented,
because local law enforcement was under the control of the southern
elite and the Democratic Party, and the federal government was
happy to go along with this state of affairs. But as blacks started
rising up against the southern elite, this bastion of support for Jim
Crow crumbled, and the Democratic Party, led by its non-southern
elements, turned against racial segregation. The renegade southern

Democrats regrouped under the banner of the States’ Rights
Democratic Party and competed in the 1948 presidential election.
Their candidate, Strom Thurmond, carried four states and gained
thirty-nine votes in the Electoral College. But this was a far cry from
the power of the unified Democratic Party in national politics and the
capture of that party by the southern elites. Strom Thurmond’s
campaign was centered on his challenge to the ability of the federal
government to intervene in the institutions of the South. He stated his
position forcefully: “I wanna tell you, ladies and gentlemen, that
there’s not enough troops in the army to force the Southern people to
break down segregation and admit the nigra race into our theaters,
into our swimming pools, into our homes, and into our churches.”

He would be proved wrong. The rulings of the Supreme Court
meant that southern educational facilities had to be desegregated,
including the University of Mississippi in Oxford. In 1962, after a long
legal battle, federal courts ruled that James Meredith, a young black
air force veteran, had to be admitted to “Ole Miss.” Opposition to the
implementation of this ruling was orchestrated by the so-called
Citizens’ Councils, the first of which had been formed in Indianola,
Mississippi, in 1954 to fight desegregation of the South. State
governor Ross Barnett publicly rejected the court-ordered
desegregation on television on September 13, announcing that state
universities would close before they agreed to be desegregated.
Finally, after much negotiation between Barnett and President John
Kennedy and Attorney General Robert Kennedy in Washington, the
federal government intervened forcibly to implement this ruling. A
day was set when U.S. marshals would bring Meredith to Oxford. In
anticipation, white supremacists began to organize. On September 30,
the day before Meredith was due to appear, U.S. marshals entered the
university campus and surrounded the main administration building.
A crowd of about 2,500 came to protest, and soon a riot broke out.
The marshals used tear gas to disperse the rioters, but soon came
under fire. By 10:00 p.m. that night, federal troops were moved into
the city to restore order. Soon there were 20,000 troops and 11,000
National Guardsmen in Oxford. In total, 300 people would be

arrested. Meredith decided to stay on campus, where, protected from
death threats by U.S. marshals and 300 soldiers, he eventually
graduated.

Federal legislation was pivotal in the process of institutional reform
in the South. During the passage of the first Civil Rights Act in 1957,
Strom Thurmond, then a senator, spoke nonstop for twenty-four hours
and eighteen minutes to prevent, or at least delay, passage of the act.
During his speech he read everything from the Declaration of
Independence to various phone books. But to no avail. The 1957 act
culminated in the Civil Rights Act of 1964 outlawing a whole gamut
of segregationist state legislation and practices. The Voting Rights Act
of 1965 declared the literacy tests, poll taxes, and other methods used
for disenfranchising southern blacks to be illegal. It also extended a
great deal of federal oversight into state elections.

The impact of all these events was a significant change in economic
and legal institutions in the South. In Mississippi, for example, only
about 5 percent of eligible black people were voting in 1960. By 1970
this figure had increased to 50 percent. In Alabama and South
Carolina, it went from around 10 percent in 1960 to 50 percent in
1970. These patterns changed the nature of elections, both for local
and national offices. More important, the political support from the
dominant Democratic Party for the extractive institutions
discriminating against blacks eroded. The way was then open for a
range of changes in economic institutions. Prior to the institutional
reforms of the 1960s, blacks had been almost entirely excluded from
jobs in textile mills. In 1960 only about 5 percent of employees in
southern textile mills were black. Civil rights legislation stopped this
discrimination. By 1970 this proportion had increased to 15 percent;
by 1990 it was at 25 percent. Economic discrimination against blacks
began to decline, the educational opportunities for blacks improved
significantly, and the southern labor market became more
competitive. Together with inclusive institutions came more rapid
economic improvements in the South. In 1940 southern states had
only about 50 percent of the level of per capita income of the United
States. This started to change in the late 1940s and ’50s. By 1990 the

gap had basically vanished.

As in Botswana, the key in the U.S. South was the development of
inclusive political and economic institutions. This came at the
juxtaposition of the increasing discontent among blacks suffering
under southern extractive institutions and the crumbling of the one-
party rule of the Democratic Party in the South. Once again, existing
institutions shaped the path of change. In this case, it was pivotal that
southern institutions were situated within the inclusive federal
institutions of the United States, and this allowed southern blacks
finally to mobilize the federal government and institutions for their
cause. The whole process was also facilitated by the fact that, with
the massive outmigration of blacks from the South and the
mechanization of cotton production, economic conditions had
changed so that southern elites were less willing to put up more of a
fight.

Rebirth in China

The Communist Party under the leadership of Mao Zedong finally
overthrew the Nationalists, led by Chiang Kai-shek, in 1949. The
People’s Republic of China was proclaimed on October 1. The
political and economic institutions created after 1949 were highly
extractive. Politically, they featured the dictatorship of the Chinese
Communist Party. No other political organization has been allowed in
China since then. Until his death in 1976, Mao entirely dominated the
Communist Party and the government. Accompanying these
authoritarian, extractive political institutions were highly extractive
economic institutions. Mao immediately nationalized land and
abolished all kinds of property rights in one fell swoop. He had
landlords, as well as other segments he deemed to be against the
regime, executed. The market economy was essentially abolished.
People in rural areas were gradually organized onto communal farms.
Money and wages were replaced by “work points,” which could be
traded for goods. Internal passports were introduced in 1956
forbidding travel without appropriate authorization, in order to

increase political and economic control. All industry was similarly
nationalized, and Mao launched an ambitious attempt to promote the
rapid development of industry through the use of “five-year plans,”
modeled on those in the Soviet Union.

As with all extractive institutions, Mao’s regime was attempting to
extract resources from the vast country he was now controlling. As in
the case of the government of Sierra Leone with its marketing board,
the Chinese Communist Party had a monopoly over the sale of
produce, such as rice and grain, which was used to heavily tax
farmers. The attempts at industrialization turned into the infamous
Great Leap Forward after 1958 with the roll-out of the second five-
year plan. Mao announced that steel output would double in a year
based on small-scale “backyard” blast furnaces. He claimed that in
fifteen years, China would catch up with British steel production. The
only problem was that there was no feasible way of meeting these
targets. To meet the plan’s goals, scrap metal had to be found, and
people would have to melt down their pots and pans and even their
agricultural implements such as hoes and plows. Workers who ought
to have been tending the fields were making steel by destroying their
plows, and thus their future ability to feed themselves and the
country. The result was a calamitous famine in the Chinese
countryside. Though scholars debate the role of Mao’s policy
compared with the impact of droughts at the same time, nobody
doubts the central role of the Great Leap Forward in contributing to
the death of between twenty and forty million people. We don’t know
precisely how many, because China under Mao did not collect the
numbers that would have documented the atrocities. Per capita
income fell by around one-quarter.

One consequence of the Great Leap Forward was that a senior
member of the Communist Party, Deng Xiaoping, a very successful
general during the revolution, who led an “anti-rightist” campaign
resulting in the execution of many “enemies of the revolution,” had a
change of heart. At a conference in Guangzhou in the south of China
in 1961, Deng argued, “No matter whether the cat is black or white, if
it catches mice, it’s a good cat.” It did not matter whether policies

appeared communist or not; China needed policies that would
encourage production so that it could feed its people.

Yet Deng was soon to suffer for his newfound practicality. On May
16, 1966, Mao announced that the revolution was under threat from
“bourgeois” interests that were undermining China’s communist
society and wishing to re-create capitalism. In response, he
announced the Great Proletarian Cultural Revolution, usually referred
to as the Cultural Revolution. The Cultural Revolution was based on
sixteen points. The first started:

Although the bourgeoisie has been overthrown, it is still
trying to use the old ideas, culture, and customs, and
habits of the exploiting classes to corrupt the masses,
capture their minds, and endeavor to stage a comeback.

The proletariat must do just the opposite: it must meet
head-on every challenge of the bourgeoisie in the
ideological field and use the new ideas, culture, customs,
and habits of the proletariat to change the mental outlook
of the whole of society. At present our objective is to
struggle against and crush those persons in authority who
are taking the capitalist road, to criticize and repudiate the
reactionary bourgeois academic authorities and the
ideology of the bourgeoisie and all other exploiting classes
and transform education, literature, and art and all other
parts of the superstructure that do not correspond to the
socialist economic base, so as to facilitate the
consolidation and development of the socialist system.

Soon the Cultural Revolution, just like the Great Leap Forward,
would start wrecking both the economy and many human lives. Units
of Red Guards were formed across the country: young, enthusiastic
members of the Communist Party who were used to purge opponents
of the regime. Many people were killed, arrested, or sent into internal
exile. Mao himself retorted to concerns about the extent of the
violence, stating, “This man Hitler was even more ferocious. The

more ferocious, the better, don’t you think? The more people you kill,
the more revolutionary you are.”

Deng found himself labeled number-two capitalist roader, was
jailed in 1967, and then was exiled to Jiangxi province in 1969, to
work in a rural tractor factory. He was rehabilitated in 1974, and
Mao was persuaded by Premier Zhou Enlai to make Deng first vice-
premier. Already in 1975, Deng supervised the composition of three
party documents that would have charted a new direction had they
been adopted. They called for a revitalization of higher education, a
return to material incentives in industry and agriculture, and the
removal of “leftists” from the party. At the time, Mao’s health was
deteriorating and power was increasingly concentrated in the hands
of the very leftists whom Deng Xiaoping wanted to remove from
power. Mao’s wife, Jiang Qing, and three of her close associates,
collectively known as the Gang of Four, had been great supporters of
the Cultural Revolution and the resulting repression. They intended to
continue using this blueprint to run the country under the
dictatorship of the Communist Party. On April 5, a spontaneous
celebration of the life of Zhou Enlai in Tiananmen Square turned into
a protest against the government. The Gang of Four blamed Deng for
the demonstrations, and he was once more stripped of all his
positions and dismissed. Instead of achieving the removal of the
leftists, Deng found that the leftists had removed him. After the death
of Zhou Enlai, Mao had appointed Hua Guofeng as the acting premier
instead of Deng. In the relative power vacuum of 1976, Hua was able
to accumulate a great deal of personal power.

In September there was a critical juncture: Mao died. The Chinese
Communist Party had been under Mao’s domination, and the Great
Leap Forward and the Cultural Revolution had been largely his
initiatives. With Mao gone, there was a true power vacuum, which
resulted in a struggle between those with different visions and
different beliefs about the consequences of change. The Gang of Four
intended to continue with the policies of the Cultural Revolution as
the only way of consolidating theirs and the Communist Party’s
power. Hua Guofeng wanted to abandon the Cultural Revolution, but

he could not distance himself too much from it, because he owed his
own rise in the party to its effects. Instead, he advocated a return to a
more balanced version of Mao’s vision, which he encapsulated in the
“Two Whatevers,” as the People’s Daily, the newspaper of the Chinese
Communist Party, put it in 1977. Hua argued, “We will resolutely
uphold whatever policy decisions Chairman Mao made, and
unswervingly follow whatever instructions Chairman Mao gave.”

Deng Xiaoping did not wish to abolish the communist regime and
replace it with inclusive markets any more than Hua did. He, too, was
part of the same group of people brought to power by the communist
revolution. But he and his supporters thought that significant
economic growth could be achieved without endangering their
political control: they had a model of growth under extractive
political institutions that would not threaten their power, because the
Chinese people were in dire need of improved living standards and
because all meaningful opposition to the Communist Party had been
obliterated during Mao’s reign and the Cultural Revolution. To
achieve this, they wished to repudiate not just the Cultural
Revolution but also much of the Maoist institutional legacy. They
realized that economic growth would be possible only with significant
moves toward inclusive economic institutions. They thus wished to
reform the economy and bolster the role of market forces and
incentives. They also wanted to expand the scope for private
ownership and reduce the role of the Communist Party in society and
the administration, getting rid of such concepts as class struggle.
Deng’s group was also open to foreign investment and international
trade, and wished to pursue a much more aggressive policy of
integrating with the international economy. Still, there were limits,
and building truly inclusive economic institutions and significantly
lessening the grip the Communist Party had on the economy weren’t
even options.

The turning point for China was Hua Guofeng’s power and his
willingness to use it against the Gang of Four. Within a month of
Mao’s death, Hua mounted a coup against the Gang of Four, having
them all arrested. He then reinstated Deng in March 1977. There was

nothing inevitable either about this course of events or about the next
significant steps, which resulted from Hua himself being politically
outmaneuvered by Deng Xiaoping. Deng encouraged public criticism
of the Cultural Revolution and began to fill key positions in the
Communist Party at all levels with people who, like him, had suffered
during this period. Hua could not repudiate the Cultural Revolution,
and this weakened him. He was also a comparative newcomer to the
centers of power, and he lacked the web of connections and informal
relations that Deng had built up over many years. In a series of
speeches, Deng began to criticize Hua’s policies. In September 1978,
he explicitly attacked the Two Whatevers, noting that rather than let
whatever Mao had said determine policy, the correct approach was to
“seek truth from facts.”

Deng also brilliantly began to bring public pressure to bear on Hua,
which was reflected most powerfully in the Democracy Wall
movement in 1978, in which people posted complaints about the
country on a wall in Beijing. In July of 1978, one of Deng’s
supporters, Hu Qiaomu, presented some basic principles of economic
reform. These included the notions that firms should be given greater
initiative and authority to make their own production decisions.
Prices should be allowed to bring supply and demand together, rather
than just being set by the government, and the state regulation of the
economy more generally ought to be reduced. These were radical
suggestions, but Deng was gaining influence. In November and
December 1978, the Third Plenum of the Eleventh Central Party
Committee produced a breakthrough. Over Hua’s objections, it was
decided that, from then on, the focus of the party would be not class
struggle but economic modernization. The plenum announced some
tentative experiments with a “household responsibility system” in
some provinces, which was an attempt to roll back collective
agriculture and introduce economic incentives into farming. By the
next year, the Central Committee was acknowledging the centrality of
the notion of “truth from facts” and declaring the Cultural Revolution
to have been a great calamity for the Chinese people. Throughout this
period, Deng was securing the appointment of his own supporters to

important positions in the party, army, and government. Though he
had to move slowly against Hua’s supporters in the Central
Committee, he created parallel bases of power. By 1980 Hua was
forced to step down from the premiership, to be replaced by Zhao
Ziyang. By 1982 Hua had been removed from the Central Committee.
But Deng did not stop there. At the Twelfth Party Congress in 1982,
and then in the National Party Conference in September 1985, he
achieved an almost complete reshuffling of the party leadership and
senior cadres. In came much younger, reform-minded people. If one
compares 1980 to 1985, then by the latter date, twenty-one of the
twenty-six members of the Politburo, eight of the eleven members of
the Communist Party secretariat, and ten of the eighteen vice-
premiers had been changed.

Now that Deng and the reformers had consummated their political
revolution and were in control of the state, they launched a series of
further changes in economic institutions. They began in agriculture:
By 1983, following the ideas of Hu Qiaomu, the household
responsibility system, which would provide economic incentives to
farmers, was universally adopted. In 1985 the mandatory state
purchasing of grain was abandoned and replaced by a system of more
voluntary contracts. Administrative control of agricultural prices was
greatly relaxed in 1985. In the urban economy, state enterprises were
given more autonomy, and fourteen “open cities” were identified and
given the ability to attract foreign investment.

It was the rural economy that took off first. The introduction of
incentives led to a dramatic increase in agricultural productivity. By
1984 grain output was one-third higher than in 1978, though fewer
people were involved in agriculture. Many had moved into
employment in new rural industries, the so-called Township Village
Enterprises. These had been allowed to grow outside the system of
state industrial planning after 1979, when it was accepted that new
firms could enter and compete with state-owned firms. Gradually
economic incentives were also introduced into the industrial sector, in
particular into the operation of state-run enterprises, though at this
stage there was no hint at privatization, which had to wait until the

mid-1990s.

The rebirth of China came with a significant move away from one
of the most extractive set of economic institutions and toward more
inclusive ones. Market incentives in agriculture and industry, then
followed by foreign investment and technology, would set China on a
path to rapid economic growth. As we will discuss further in the next
chapter, this was growth under extractive political institutions, even
if they were not as repressive as they had been under the Cultural
Revolution and even if economic institutions were becoming partially
inclusive. All of this should not understate the degree to which the
changes in economic institutions in China were radical. China broke
the mold, even if it did not transform its political institutions. As in
Botswana and the U.S. South, the crucial changes came during a
critical juncture — in the case of China, following Mao’s death. They
were also contingent, in fact highly contingent, as there was nothing
inevitable about the Gang of Four losing the power struggle; and if
they had not, China would not have experienced the sustained
economic growth it has seen in the last thirty years. But the
devastation and human suffering that the Great Leap Forward and the
Cultural Revolution caused generated sufficient demand for change
that Deng Xiaoping and his allies were able to win the political fight.

Botswana, China, and the U.S. South, just like the Glorious Revolution
in England, the French Revolution, and the Meiji Restoration in
Japan, are vivid illustrations that history is not destiny. Despite the
vicious circle, extractive institutions can be replaced by inclusive
ones. But it is neither automatic nor easy. A confluence of factors, in
particular a critical juncture coupled with a broad coalition of those
pushing for reform or other propitious existing institutions, is often
necessary for a nation to make strides toward more inclusive
institutions. In addition some luck is key, because history always
unfolds in a contingent way.

15.

UNDERSTANDING PROSPERITY AND POVERTY

Historical Origins

There are huge differences in living standards around the world. Even

the poorest citizens of the United States have incomes and access to
health care, education, public services, and economic and social
opportunities that are far superior to those available to the vast mass
of people living in sub-Saharan Africa, South Asia, and Central
America. The contrast of South and North Korea, the two Nogaleses,
and the United States and Mexico reminds us that these are relatively
recent phenomena. Five hundred years ago, Mexico, home to the
Aztec state, was certainly richer than the polities to the north, and the
United States did not pull ahead of Mexico until the nineteenth
century. The gap between the two Nogaleses is even more recent.
South and North Korea were economically, as well as socially and
culturally, indistinguishable before the country was divided at the
38th parallel after the Second World War. Similarly, most of the huge
economic differences we observe around us today emerged over the
last two hundred years.

Did this all need to be so? Was it historically — or geographically or
culturally or ethnically — predetermined that Western Europe, the
United States, and Japan would become so much richer than sub-
Saharan Africa, Latin America, and China over the last two hundred
years or so? Was it inevitable that the Industrial Revolution would get
under way in the eighteenth century in Britain, and then spread to
Western Europe and Europe’s offshoots in North America and
Australasia? Is a counterfactual world where the Glorious Revolution
and the Industrial Revolution take place in Peru, which then colonizes

Western Europe and enslaves whites, possible, or is it just a form of
historical science fiction?

To answer — in fact, even to reason about — these questions, we need
a theory of why some nations are prosperous while others fail and are
poor. This theory needs to delineate both the factors that create and
retard prosperity and their historical origins. This book has proposed
such a theory. Any complex social phenomenon, such as the origins of
the different economic and political trajectories of hundreds of
polities around the world, likely has a multitude of causes, making
most social scientists shun monocausal, simple, and broadly
applicable theories and instead seek different explanations for
seemingly similar outcomes emerging in different times and areas.
Instead we’ve offered a simple theory and used it to explain the main
contours of economic and political development around the world
since the Neolithic Revolution. Our choice was motivated not by a
naive belief that such a theory could explain everything, but by the
belief that a theory should enable us to focus on the parallels,
sometimes at the expense of abstracting from many interesting
details. A successful theory, then, does not faithfully reproduce
details, but provides a useful and empirically well-grounded
explanation for a range of processes while also clarifying the main
forces at work.

Our theory has attempted to achieve this by operating on two
levels. The first is the distinction between extractive and inclusive
economic and political institutions. The second is our explanation for
why inclusive institutions emerged in some parts of the world and not
in others. While the first level of our theory is about an institutional
interpretation of history, the second level is about how history has
shaped institutional trajectories of nations.

Central to our theory is the link between inclusive economic and
political institutions and prosperity. Inclusive economic institutions
that enforce property rights, create a level playing field, and
encourage investments in new technologies and skills are more
conducive to economic growth than extractive economic institutions
that are structured to extract resources from the many by the few and

that fail to protect property rights or provide incentives for economic
activity. Inclusive economic institutions are in turn supported by, and
support, inclusive political institutions, that is, those that distribute
political power widely in a pluralistic manner and are able to achieve
some amount of political centralization so as to establish law and
order, the foundations of secure property rights, and an inclusive
market economy. Similarly, extractive economic institutions are
synergistically linked to extractive political institutions, which
concentrate power in the hands of a few, who will then have
incentives to maintain and develop extractive economic institutions
for their benefit and use the resources they obtain to cement their
hold on political power.

These tendencies do not imply that extractive economic and
political institutions are inconsistent with economic growth. On the
contrary, every elite would, all else being equal, like to encourage as
much growth as possible in order to have more to extract. Extractive
institutions that have achieved at least a minimal degree of political
centralization are often able to generate some amount of growth.
What is crucial, however, is that growth under extractive institutions
will not be sustained, for two key reasons. First, sustained economic
growth requires innovation, and innovation cannot be decoupled
from creative destruction, which replaces the old with the new in the
economic realm and also destabilizes established power relations in
politics. Because elites dominating extractive institutions fear creative
destruction, they will resist it, and any growth that germinates under
extractive institutions will be ultimately short lived. Second, the
ability of those who dominate extractive institutions to benefit greatly
at the expense of the rest of society implies that political power under
extractive institutions is highly coveted, making many groups and
individuals fight to obtain it. As a consequence, there will be
powerful forces pushing societies under extractive institutions toward
political instability.

The synergies between extractive economic and political
institutions create a vicious circle, where extractive institutions, once
in place, tend to persist. Similarly, there is a virtuous circle associated

with inclusive economic and political institutions. But neither the
vicious nor the virtuous circle is absolute. In fact, some nations live
under inclusive institutions today because, though extractive
institutions have been the norm in history, some societies have been
able to break the mold and transition toward inclusive institutions.
Our explanation for these transitions is historical, but not historically
predetermined. Major institutional change, the requisite for major
economic change, takes place as a result of the interaction between
existing institutions and critical junctures. Critical junctures are major
events that disrupt the existing political and economic balance in one
or many societies, such as the Black Death, which killed possibly as
much as half the population of most areas in Europe during the
fourteenth century; the opening of Atlantic trade routes, which
created enormous profit opportunities for many in Western Europe;
and the Industrial Revolution, which offered the potential for rapid
but also disruptive changes in the structure of economies around the
world.

Existing institutional differences among societies themselves are a
result of past institutional changes. Why does the path of institutional
change differ across societies? The answer to this question lies in
institutional drift. In the same way that the genes of two isolated
populations of organisms will drift apart slowly because of random
mutations in the so-called process of evolutionary or genetic drift,
two otherwise similar societies will also drift apart institutionally —
albeit, again, slowly. Conflict over income and power, and indirectly
over institutions, is a constant in all societies. This conflict often has a
contingent outcome, even if the playing field over which it transpires
is not level. The outcome of this conflict leads to institutional drift.
But this is not necessarily a cumulative process. It does not imply that
the small differences that emerge at some point will necessarily
become larger over time. On the contrary, as our discussion of Roman
Britain in chapter 6 illustrates, small differences open up, and then
disappear, and then reappear again. However, when a critical
juncture arrives, these small differences that have emerged as a result
of institutional drift may be the small differences that matter in

leading otherwise quite similar societies to diverge radically.

We saw in chapters 7 and 8 that despite the many similarities
between England, France, and Spain, the critical juncture of the
Atlantic trade had the most transformative impact on England
because of such small differences — the fact that because of
developments during the fifteenth and sixteenth centuries, the English
Crown could not control all overseas trade, as this trade was mostly
under Crown monopoly in France and Spain. As a result, in France
and Spain, it was the monarchy and the groups allied with it who
were the main beneficiaries of the large profits created by Atlantic
trade and colonial expansion, while in England it was groups strongly
opposed to the monarchy who gained from economic opportunities
thrown open by this critical juncture. Though institutional drift leads
to small differences, its interplay with critical junctures leads to
institutional divergence, and thus this divergence then creates the
now more major institutional differences that the next critical
juncture will affect.

History is key, since it is historical processes that, via institutional
drift, create the differences that may become consequential during
critical junctures. Critical junctures themselves are historical turning
points. And the vicious and virtuous circles imply that we have to
study history to understand the nature of institutional differences that
have been historically structured. Yet our theory does not imply
historical determinism — or any other kind of determinism. It is for
this reason that the answer to the question we started with in this
chapter is no: there was no historical necessity that Peru end up so
much poorer than Western Europe or the United States.

To start with, in contrast with the geography and culture
hypotheses, Peru is not condemned to poverty because of its
geography or culture. In our theory, Peru is so much poorer than
Western Europe and the United States today because of its
institutions, and to understand the reasons for this, we need to
understand the historical process of institutional development in
Peru. As we saw in the second chapter, five hundred years ago the
Inca Empire, which occupied contemporary Peru, was richer, more

technologically sophisticated, and more politically centralized than
the smaller polities occupying North America. The turning point was
the way in which this area was colonized and how this contrasted
with the colonization of North America. This resulted not from a
historically predetermined process but as the contingent outcome of
several pivotal institutional developments during critical junctures. At
least three factors could have changed this trajectory and led to very
different long-run patterns.

First, institutional differences within the Americas during the
fifteenth century shaped how these areas were colonized. North
America followed a different institutional trajectory than Peru
because it was sparsely settled before colonization and attracted
European settlers who then successfully rose up against the elite
whom entities such as the Virginia Company and the English Crown
had tried to create. In contrast, Spanish conquistadors found a
centralized, extractive state in Peru they could take over and a large
population they could put to work in mines and plantations. There
was also nothing geographically predetermined about the lay of the
land within the Americas at the time the Europeans arrived. In the
same way that the emergence of a centralized state led by King
Shyaam among the Bushong was a result of a major institutional
innovation, or perhaps even of political revolution, as we saw in
chapter 5, the Inca civilization in Peru and the large populations in
this area resulted from major institutional innovations. These could
instead have taken place in North America, in places such as the
Mississippi Valley or even the northeastern United States. Had this
been the case, Europeans might have encountered empty lands in the
Andes and centralized states in North America, and the roles of Peru
and the United States could have been reversed. Europeans would
then have settled in areas around Peru, and the conflict between the
majority of settlers and the elite could have led to the creation of
inclusive institutions there instead of in North America. The
subsequent paths of economic development would then likely have
been different.

Second, the Inca Empire might have resisted European colonialism,

as Japan did when Commodore Perry’s ships arrived in Edo Bay.
Though the greater extractiveness of the Inca Empire in contrast with
Tokugawa, Japan, certainly made a political revolution akin to the
Meiji Restoration less likely in Peru, there was no historical necessity
that the Inca completely succumb to European domination. If they
had been able to resist and even institutionally modernize in response
to the threats, the whole path of the history of the New World, and
with it the entire history of the world, could have been different.

Third and most radically, it is not even historically or
geographically or culturally predetermined that Europeans should
have been the ones colonizing the world. It could have been the
Chinese or even the Incas. Of course, such an outcome is impossible
when we look at the world from the vantage point of the fifteenth
century, by which time Western Europe had pulled ahead of the
Americas, and China had already turned inward. But Western Europe
of the fifteenth century was itself an outcome of a contingent process
of institutional drift punctuated by critical junctures, and nothing
about it was inevitable. Western European powers could not have
surged ahead and conquered the world without several historic
turning points. These included the specific path that feudalism took,
replacing slavery and weakening the power of monarchs on the way;
the fact that the centuries following the turn of the first millennium in
Europe witnessed the development of independent and commercially
autonomous cities; the fact that European monarchs were not as
threatened by, and consequently did not try to discourage, overseas
trade as the Chinese emperors did during the Ming dynasty; and the
arrival of the Black Death, which shook up the foundations of the
feudal order. If these events had transpired differently, we could be
living in a very different world today, one in which Peru might be
richer than Western Europe or the United States.

Naturally, the predictive power of a theory where both small differences
and contingency play key roles will be limited. Few would have
predicted in the fifteenth or even the sixteenth centuries, let alone in

the many centuries following the fall of the Roman Empire, that the
major breakthrough toward inclusive institutions would happen in
Britain. It was only the specific process of institutional drift and the
nature of the critical juncture created by the opening of Atlantic trade
that made this possible. Neither would many have believed in the
midst of the Cultural Revolution during the 1970s that China would
soon be on a path toward radical changes in its economic institutions
and subsequently on a breakneck growth trajectory. It is similarly
impossible to predict with any certainty what the lay of the land will
be in five hundred years. Yet these are not shortcomings of our
theory. The historical account we have presented so far indicates that
any approach based on historical determinism — based on geography,
culture, or even other historical factors — is inadequate. Small
differences and contingency are not just part of our theory; they are
part of the shape of history.

Even if making precise predictions about which societies will
prosper relative to others is difficult, we have seen throughout the
book that our theory explains the broad differences in the prosperity
and poverty of nations around the world fairly well. We will see in
the rest of this chapter that it also provides some guidelines as to
what types of societies are more likely to achieve economic growth
over the next several decades.

First, vicious and virtuous circles generate a lot of persistence and
sluggishness. There should be little doubt that in fifty or even a
hundred years, the United States and Western Europe, based on their
inclusive economic and political institutions, will be richer, most
likely considerably richer, than sub-Saharan Africa, the Middle East,
Central America, or Southeast Asia. However, within these broad
patterns there will be major institutional changes in the next century,
with some countries breaking the mold and transitioning from poor to
rich.

Nations that have achieved almost no political centralization, such
as Somalia and Afghanistan, or those that have undergone a collapse
of the state, such as Haiti did over the last several decades — long
before the massive earthquake there in 2010 led to the devastation of

the country’s infrastructure — are unlikely either to achieve growth
under extractive political institutions or to make major changes
toward inclusive institutions. Instead, nations likely to grow over the
next several decades — albeit probably under extractive institutions —
are those that have attained some degree of political centralization. In
sub-Saharan Africa this includes Burundi, Ethiopia, Rwanda, nations
with long histories of centralized states, and Tanzania, which has
managed to build such centralization, or at least put in place some of
the prerequisites for centralization, since independence. In Latin
America, it includes Brazil, Chile, and Mexico, which have not only
achieved political centralization but also made significant strides
toward nascent pluralism. Our theory would suggest that sustained
economic growth is very unlikely in Colombia.

Our theory also suggests that growth under extractive political
institutions, as in China, will not bring sustained growth, and is likely
to run out of steam. Beyond these cases, there is much uncertainty.
Cuba, for example, might transition toward inclusive institutions and
experience a major economic transformation, or it may linger on
under extractive political and economic institutions. The same is true
of North Korea and Burma (Myanmar) in Asia. Thus, while our theory
provides the tools for thinking about how institutions change and the
consequences of such changes, the nature of this change — the role of
small differences and contingency — makes more precise predictions
difficult.

Even greater caution is necessary in drawing policy
recommendations from this broad account of the origins of prosperity
and poverty. In the same way that the impact of critical junctures
depends on existing institutions, how a society will respond to the
same policy intervention depends on the institutions that are in place.
Of course, our theory is all about how nations can take steps toward
prosperity — by transforming their institutions from extractive to
inclusive. But it also makes it very clear from the outset that there are
no easy recipes for achieving such a transition. First, the vicious circle
implies that changing institutions is much harder than it first appears.
In particular, extractive institutions can re-create themselves under

different guises, as we saw with the iron law of oligarchy in chapter
12. Thus the fact that the extractive regime of President Mubarak was
overturned by popular protest in February 2011 does not guarantee
that Egypt will move onto a path to more inclusive institutions.
Instead extractive institutions may re-create themselves despite the
vibrant and hopeful pro-democracy movement. Second, because the
contingent path of history implies that it is difficult to know whether
a particular interplay of critical junctures and existing institutional
differences will lead toward more inclusive or extractive institutions,
it would be heroic to formulate general policy recommendations to
encourage change toward inclusive institutions. Nevertheless, our
theory is still useful for policy analysis, as it enables us to recognize
bad policy advice, based on either incorrect hypotheses or inadequate
understanding of how institutions can change. In this, as in most
things, avoiding the worst mistakes is as important as — and more
realistic than — attempting to develop simple solutions. Perhaps this is
most clearly visible when we consider current policy
recommendations encouraging “authoritarian growth” based on the
successful Chinese growth experience of the last several decades. We
next explain why these policy recommendations are misleading and
why Chinese growth, as it has unfolded so far, is just another form of
growth under extractive political institutions, unlikely to translate
into sustained economic development.

The Irresistible Charm of Authoritarian Growth

Dai Guofang recognized the coming urban boom in China early on.
New highways, business centers, residences, and skyscrapers were
sprawling everywhere around China in the 1990s, and Dai thought
this growth would only pick up speed in the next decade. He reasoned
that his company, Jingsu Tieben Iron and Steel, could capture a large
market as a low-cost producer, especially compared with the
inefficient state-owned steel factories. Dai planned to build a true
steel giant, and with support from the local party bosses in
Changzhou, he started building in 2003. By March 2004, however,

the project had been stopped by order of the Chinese Communist
Party in Beijing, and Dai was arrested for reasons never clearly
articulated. The authorities may have presumed that they would find
some incriminating evidence in Dai’s accounts. In the event, he spent
the next five years in jail and home detention, and was found guilty
on a minor charge in 2009. His real crime was to start a large project
that would compete with state-sponsored companies and do so
without the approval of the higher-ups in the Communist Party. This
was certainly the lesson that others drew from the case.

The Communist Party’s reaction to entrepreneurs such as Dai
should not be a surprise. Chen Yun, one of Deng Xiaoping’s closest
associates and arguably the major architect behind the early market
reforms, summarized the views of most party cadres with a “bird in a
cage” analogy for the economy: China’s economy was the bird; the
party’s control, the cage, had to be enlarged to make the bird
healthier and more dynamic, but it could not be unlocked or
removed, lest the bird fly away. Jiang Zemin, shortly after becoming
general secretary of the Communist Party in 1989, the most powerful
position in China, went even further and summarized the party’s
suspicion of entrepreneurs by characterizing them as “self-employed
traders and peddlers [who] cheat, embezzle, bribe and evade
taxation.” Throughout the 1990s, even as foreign investment was
pouring into China and state-owned enterprises were encouraged to
expand, private entrepreneurship was greeted with suspicion, and
many entrepreneurs were expropriated or even jailed. Jiang Zemin’s
view of entrepreneurs, though in relative decline, is still widespread
in China. In the words of a Chinese economist, “Big state companies
can get involved in huge projects. But when private companies do so,
especially in competition with the state, then trouble comes from
every corners [sic].”

While scores of private companies are now profitably operating in
China, many elements of the economy are still under the party’s
command and protection. Journalist Richard McGregor reports that
on the desk of the head of each of the biggest state companies in
China stands a red phone. When it rings, it is the party calling with

orders on what the company should do, where it should invest, and
what its targets will be. These giant companies are still under the
command of the party, a fact we are reminded of when the party
decides to shuffle their chief executives, fire them, or promote them,
with little explanation.

These stories of course do not deny that China has made great
strides toward inclusive economic institutions, strides that underpin
its spectacular growth rates over the past thirty years. Most
entrepreneurs have some security, not least because they cultivate the
support of local cadres and Communist Party elites in Beijing. Most
state-owned enterprises seek profits and compete in international
markets. This is a radical change from the China of Mao. As we saw
in the previous chapter, China was first able to grow because under
Deng Xiaoping there were radical reforms away from the most
extractive economic institutions and toward inclusive economic
institutions. Growth has continued as Chinese economic institutions
have been on a path toward greater inclusiveness, albeit at a slow
pace. China is also greatly benefiting from its large supply of cheap
labor and its access to foreign markets, capital, and technologies.

Even if Chinese economic institutions are incomparably more
inclusive today than three decades ago, the Chinese experience is an
example of growth under extractive political institutions. Despite the
recent emphasis in China on innovation and technology, Chinese
growth is based on the adoption of existing technologies and rapid
investment, not creative destruction. An important aspect of this is
that property rights are not entirely secure in China. Every now and
then, just like Dai, some entrepreneurs are expropriated. Labor
mobility is tightly regulated, and the most basic of property rights,
the right to sell one’s own labor in the way one wishes, is still highly
imperfect. The extent to which economic institutions are still far from
being truly inclusive is illustrated by the fact that only a few
businessmen and -women would even venture into any activity
without the support of the local party cadre or, even more important,
of Beijing. The connection between business and the party is highly
lucrative for both. Businesses supported by the party receive contracts

on favorable terms, can evict ordinary people to expropriate their
land, and violate laws and regulations with impunity. Those who
stand in the path of this business plan will be trampled and can even
be jailed or murdered.

The all-too-present weight of the Communist Party and extractive
institutions in China remind us of the many similarities between
Soviet growth in the 1950s and ’60s and Chinese growth today,
though there are also notable differences. The Soviet Union achieved
growth under extractive economic institutions and extractive political
institutions because it forcibly allocated resources toward industry
under a centralized command structure, particularly armaments and
heavy industry. Such growth was feasible partly because there was a
lot of catching up to be done. Growth under extractive institutions is
easier when creative destruction is not a necessity. Chinese economic
institutions are certainly more inclusive than those in the Soviet
Union, but China’s political institutions are still extractive. The
Communist Party is all-powerful in China and controls the entire state
bureaucracy, the armed forces, the media, and large parts of the
economy. Chinese people have few political freedoms and very little
participation in the political process.

Many have long believed that growth in China would bring
democracy and greater pluralism. There was a real sense in 1989 that
the Tiananmen Square demonstrations would lead to greater opening
and perhaps even the collapse of the communist regime. But tanks
were unleashed on the demonstrators, and instead of a peaceful
revolution, history books now call it the Tiananmen Square Massacre.
In many ways, Chinese political institutions became more extractive
in the aftermath of Tiananmen; reformers such as Zhao Ziyang, who
as general secretary of the Communist Party lent his support to the
students in Tiananmen Square, were purged, and the party clamped
down on civil liberties and press freedom with greater zeal. Zhao
Ziyang was put under house arrest for more than fifteen years, and
his public record was gradually erased, so that he would not be even
a symbol for those who supported political change.

Today the party’s control over the media, including the Internet, is

unprecedented. Much of this is achieved through self-censorship:
media outlets know that they should not mention Zhao Ziyang or Liu
Xiaobo, the government critic demanding greater democratization,
who is still languishing in prison even after he was awarded the
Nobel Peace Prize. Self-censorship is supported by an Orwellian
apparatus that can monitor conversations and communications, close
Web sites and newspapers, and even selectively block access to
individual news stories on the Internet. All of this was on display
when news about corruption charges against the son of the general
secretary of the party since 2002, Hu Jintao, broke out in 2009. The
party’s apparatus immediately sprang into action and was not only
able to prevent Chinese media from covering the case but also
managed to selectively block stories about the case on the New York
Times and Financial Times Web sites.

Because of the party’s control over economic institutions, the extent
of creative destruction is heavily curtailed, and it will remain so until
there is radical reform in political institutions. Just as in the Soviet
Union, the Chinese experience of growth under extractive political
institutions is greatly facilitated because there is a lot of catching up
to do. Income per capita in China is still a fraction of that in the
United States and Western Europe. Of course, Chinese growth is
considerably more diversified than Soviet growth; it doesn’t rely on
only armaments or heavy industry, and Chinese entrepreneurs are
showing a lot of ingenuity. All the same, this growth will run out of
steam unless extractive political institutions make way for inclusive
institutions. As long as political institutions remain extractive, growth
will be inherently limited, as it has been in all other similar cases.

The Chinese experience does raise several interesting questions
about the future of Chinese growth and, more important, the
desirability and viability of authoritarian growth. Such growth has
become a popular alternative to the “Washington consensus,” which
emphasizes the importance of market and trade liberalization and
certain forms of institutional reform for kick-starting economic
growth in many less developed parts of the world. While part of the
appeal of authoritarian growth comes as a reaction to the Washington

consensus, perhaps its greater charm — certainly to the rulers
presiding over extractive institutions — is that it gives them free rein
in maintaining and even strengthening their hold on power and
legitimizes their extraction.

As our theory highlights, particularly in societies that have
undergone some degree of state centralization, this type of growth
under extractive institutions is possible and may even be the most
likely scenario for many nations, ranging from Cambodia and
Vietnam to Burundi, Ethiopia, and Rwanda. But it also implies that
like all examples of growth under extractive political institutions, it
will not be sustained.

In the case of China, the growth process based on catch-up, import
of foreign technology, and export of low-end manufacturing products
is likely to continue for a while. Nevertheless, Chinese growth is also
likely to come to an end, particularly once China reaches the
standards of living level of a middle-income country. The most likely
scenario may be for the Chinese Communist Party and the
increasingly powerful Chinese economic elite to manage to maintain
their very tight grip on power in the next several decades. In this
case, history and our theory suggest that growth with creative
destruction and true innovation will not arrive, and the spectacular
growth rates in China will slowly evaporate. But this outcome is far
from preordained; it can be avoided if China transitions to inclusive
political institutions before its growth under extractive institutions
reaches its limit. Nevertheless, as we will see next, there is little
reason to expect that a transition in China toward more inclusive
political institutions is likely or that it will take place automatically
and painlessly.

Even some voices within the Chinese Communist Party are
recognizing the dangers on the road ahead and are throwing around
the idea that political reform — that is, a transition to more inclusive
political institutions, to use our terminology — is necessary. The
powerful premier Wen Jiabao has recently warned of the danger that
economic growth will be hampered unless political reform gets under
way. We think Wen’s analysis is prescient, even if some people doubt

his sincerity. But many in the West do not agree with Wen’s
pronouncements. To them, China reveals an alternative path to
sustained economic growth, one under authoritarianism rather than
inclusive economic and political institutions. But they are wrong. We
have already seen the important salient roots of Chinese success: a
radical change in economic institutions away from rigidly communist
ones and toward institutions that provide incentives to increase
productivity and to trade. Looked at from this perspective, there is
nothing fundamentally different about China’s experience relative to
that of countries that have managed to take steps away from
extractive and toward inclusive economic institutions, even when this
takes place under extractive political institutions, as in the Chinese
case. China has thus achieved economic growth not thanks to its
extractive political institutions, but despite them: its successful
growth experience over the last three decades is due to a radical shift
away from extractive economic institutions and toward significantly
more inclusive economic institutions, which was made more difficult,
not easier, by the presence of highly authoritarian, extractive political
institutions.

A different type of endorsement of authoritarian growth recognizes its
unattractive nature but claims that authoritarianism is just a passing
stage. This idea goes back to one of the classical theories of political
sociology, the theory of modernization, formulated by Seymour
Martin Lipset. Modernization theory maintains that all societies, as
they grow, are headed toward a more modern, developed, and
civilized existence, and in particular toward democracy. Many
followers of modernization theory also claim that, like democracy,
inclusive institutions will emerge as a by-product of the growth
process. Moreover, even though democracy is not the same as
inclusive political institutions, regular elections and relatively
unencumbered political competition are likely to bring forth the
development of inclusive political institutions. Different versions of
modernization theory also claim that an educated workforce will

naturally lead to democracy and better institutions. In a somewhat
postmodern version of modernization theory, New York Times
columnist Thomas Friedman went so far as to suggest that once a
country got enough McDonald’s restaurants, democracy and
institutions were bound to follow. All this paints an optimistic
picture. Over the past sixty years, most countries, even many of those
with extractive institutions, have experienced some growth, and most
have witnessed notable increases in the educational attainment of
their workforces. So, as their incomes and educational levels continue
to rise, one way or another, all other good things, such as democracy,
human rights, civil liberties, and secure property rights, should
follow.

Modernization theory has a wide following both within and outside
academia. Recent U.S. attitudes toward China, for example, have been
shaped by this theory. George H. W. Bush summarized U.S. policy
toward Chinese democracy as “Trade freely with China and time is on
our side.” The idea was that as China traded freely with the West, it
would grow, and that growth would bring democracy and better
institutions in China, as modernization theory predicted. Yet the rapid
increase in U.S. -China trade since the mid-1980s has done little for
Chinese democracy, and the even closer integration that is likely to
follow during the next decade will do equally little.

The attitudes of many about the future of Iraqi society and
democracy in the aftermath of the U.S. -led invasion were similarly
optimistic because of modernization theory. Despite its disastrous
economic performance under Saddam Hussein’s regime, Iraq was not
as poor in 2002 as many sub-Saharan African nations, and it had a
comparatively well-educated population, so it was believed to be ripe
ground for the development of democracy and civil liberties, and
perhaps even what we would describe as pluralism. These hopes were
quickly dashed as chaos and civil war descended upon Iraqi society.

Modernization theory is both incorrect and unhelpful for thinking
about how to confront the major problems of extractive institutions in
failing nations. The strongest piece of evidence in favor of
modernization theory is that rich nations are the ones that have

democratic regimes, respect civil and human rights, and enjoy
functioning markets and generally inclusive economic institutions.
Yet interpreting this association as supporting modernization theory
ignores the major effect of inclusive economic and political
institutions on economic growth. As we have argued throughout this
book, it is the societies with inclusive institutions that have grown
over the past three hundred years and have become relatively rich
today. That this accounts for what we see around us is shown clearly
if we look at the facts slightly differently: while nations that have
built inclusive economic and political institutions over the last several
centuries have achieved sustained economic growth, authoritarian
regimes that have grown more rapidly over the past sixty or one
hundred years, contrary to what Lipset’s modernization theory would
claim, have not become more democratic. And this is in fact not
surprising. Growth under extractive institutions is possible precisely
because it doesn’t necessarily or automatically imply the demise of
these very institutions. In fact, it is often generated because those in
control of the extractive institutions view economic growth as not a
threat but a support to their regime, as the Chinese Communist Party
has done since the 1980s. It is also not surprising that growth
generated by increases in the value of the natural resources of a
nation, such as in Gabon, Russia, Saudi Arabia, and Venezuela, is
unlikely to lead to a fundamental transformation of these
authoritarian regimes toward inclusive institutions.

The historical record is even less generous to modernization theory.
Many relatively prosperous nations have succumbed to and supported
repressive dictatorships and extractive institutions. Both Germany and
Japan were among the richest and most industrialized nations in the
world in the first half of the twentieth century, and had
comparatively well-educated citizens. This did not prevent the rise of
the National Socialist Party in Germany or a militaristic regime intent
on territorial expansion via war in Japan — making both political and
economic institutions take a sharp turn toward extractive institutions.
Argentina was also one of the richest countries in the world in the
nineteenth century, as rich as or even richer than Britain, because it

was the beneficiary of the worldwide resource boom; it also had the
most educated population in Latin America. But democracy and
pluralism were no more successful, and were arguably less successful,
in Argentina than in much of the rest of Latin America. One coup
followed another, and as we saw in chapter 11, even democratically
elected leaders acted as rapacious dictators. Even more recently there
has been little progress toward inclusive economic institutions, and as
we saw in chapter 13, twenty-first-century Argentinian governments
can still expropriate their citizens’ wealth with impunity.

All of this highlights several important ideas. First, growth under
authoritarian, extractive political institutions in China, though likely
to continue for a while yet, will not translate into sustained growth,
supported by truly inclusive economic institutions and creative
destruction. Second, contrary to the claims of modernization theory,
we should not count on authoritarian growth leading to democracy or
inclusive political institutions. China, Russia, and several other
authoritarian regimes currently experiencing some growth are likely
to reach the limits of extractive growth before they transform their
political institutions in a more inclusive direction — and in fact,
probably before there is any desire among the elite for such changes
or any strong opposition forcing them to do so. Third, authoritarian
growth is neither desirable nor viable in the long run, and thus should
not receive the endorsement of the international community as a
template for nations in Latin America, Asia, and sub-Saharan Africa,
even if it is a path that many nations will choose precisely because it
is sometimes consistent with the interests of the economic and
political elites dominating them.

You Cant Engineer Prosperity

Unlike the theory we have developed in this book, the ignorance
hypothesis comes readily with a suggestion about how to “solve” the
problem of poverty: if ignorance got us here, enlightening and
informing rulers and policymakers can get us out, and we should be
able to “engineer” prosperity around the world by providing the right

advice and by convincing politicians of what is good economics. In
chapter 2, when we discussed this hypothesis, we showed how the
experience of Ghana’s prime minister Kofi Busia in the early 1970s
underscored the fact that the main obstacle to the adoption of policies
that would reduce market failures and encourage economic growth is
not the ignorance of politicians, but the incentives and constraints
they face from the political and economic institutions in their
societies. Nevertheless, the ignorance hypothesis still rules supreme in
Western policymaking circles, which, almost to the exclusion of
anything else, focus on how to engineer prosperity.

These engineering attempts come in two flavors. The first, often
advocated by international organizations such as the International
Monetary Fund, recognizes that poor development is caused by bad
economic policies and institutions, and then proposes a list of
improvements these international organizations attempt to induce
poor countries to adopt. (The Washington consensus makes up one
such list.) These improvements focus on sensible things such as
macroeconomic stability and seemingly attractive macroeconomic
goals such as a reduction in the size of the government sector, flexible
exchange rates, and capital account liberalization. They also focus on
more microeconomic goals, such as privatization, improvements in
the efficiency of public service provision, and perhaps also
suggestions as to how to improve the functioning of the state itself by
emphasizing anticorruption measures. Though on their own many of
these reforms might be sensible, the approach of international
organizations in Washington, London, Paris, and elsewhere is still
steeped in an incorrect perspective that fails to recognize the role of
political institutions and the constraints they place on policymaking.
Attempts by international institutions to engineer economic growth
by hectoring poor countries into adopting better policies and
institutions are not successful because they do not take place in the
context of an explanation of why bad policies and institutions are
there in the first place, except that the leaders of poor countries are
ignorant. The consequence is that the policies are not adopted and
not implemented, or are implemented in name only.

For example, many economies around the world ostensibly
implementing such reforms, most notably in Latin America, stagnated
throughout the 1980s and ’90s. In reality, such reforms were foisted
upon these countries in contexts where politics went on as usual.
Hence, even when reforms were adopted, their intent was subverted,
or politicians used other ways to blunt their impact. All this is
illustrated by the “implementation” of one of the key
recommendations of international institutions aimed at achieving
macroeconomic stability, central bank independence. This
recommendation either was implemented in theory but not in
practice or was undermined by the use of other policy instruments. It
was quite sensible in principle. Many politicians around the world
were spending more than they were raising in tax revenue and were
then forcing their central banks to make up the difference by printing
money. The resulting inflation was creating instability and
uncertainty. The theory was that independent central banks, just like
the Bundesbank in Germany, would resist political pressure and put a
lid on inflation. Zimbabwe’s president Mugabe decided to heed
international advice; he declared the Zimbabwean central bank
independent in 1995. Before this, the inflation rate in Zimbabwe was
hovering around 20 percent. By 2002 it had reached 140 percent; by
2003, almost 600 percent; by 2007, 66,000 percent; and by 2008, 230
million percent! Of course, in a country where the president wins the
lottery (this page-this page), it should surprise nobody that passing a
law making the central bank independent means nothing. The
governor of the Zimbabwean central bank probably knew how his
counterpart in Sierra Leone had “fallen” from the top floor of the
central bank building when he disagreed with Siaka Stevens (this
page). Independent or not, complying with the president’s demands
was the prudent choice for his personal health, even if not for the
health of the economy. Not all countries are like Zimbabwe. In
Argentina and Colombia, central banks were also made independent
in the 1990s, and they actually did their job of reducing inflation. But
since in neither country was politics changed, political elites could
use other ways to buy votes, maintain their interests, and reward

themselves and their followers. Since they couldn’t do this by printing
money anymore, they had to use a different way. In both countries
the introduction of central bank independence coincided with a big
expansion in government expenditures, financed largely by
borrowing.

The second approach to engineering prosperity is much more in
vogue nowadays. It recognizes that there are no easy fixes for lifting a
nation from poverty to prosperity overnight or even in the course of a
few decades. Instead, it claims, there are many “micro-market
failures” that can be redressed with good advice, and prosperity will
result if policymakers take advantage of these opportunities — which,
again, can be achieved with the help and vision of economists and
others. Small market failures are everywhere in poor countries, this
approach claims — for example, in their education systems, health care
delivery, and the way their markets are organized. This is
undoubtedly true. But the problem is that these small market failures
may be only the tip of the iceberg, the symptom of deeper-rooted
problems in a society functioning under extractive institutions. Just as
it is not a coincidence that poor countries have bad macroeconomic
policies, it is not a coincidence that their educational systems do not
work well. These market failures may not be due solely to ignorance.
The policymakers and bureaucrats who are supposed to act on well-
intentioned advice may be as much a part of the problem, and the
many attempts to rectify these inefficiencies may backfire precisely
because those in charge are not grappling with the institutional
causes of the poverty in the first place.

These problems are illustrated by intervention engineered by the
nongovernmental organization (NGO) Seva Mandir to improve health
care delivery in the state of Rajasthan in India. The story of health
care delivery in India is one of deep-rooted inefficiency and failure.
Government-provided health care is, at least in theory, widely
available and cheap, and the personnel are generally qualified. But
even the poorest Indians do not use government health care facilities,
opting instead for the much more expensive, unregulated, and
sometimes even deficient private providers. This is not because of

some type of irrationality: people are unable to get any care from
government facilities, which are plagued by absenteeism. If an Indian
visited his government-run facility, not only would there be no nurses
there, but he would probably not even be able to get in the building,
because health care facilities are closed most of the time.

In 2006 Seva Mandir, together with a group of economists,
designed an incentive scheme to encourage nurses to turn up for work
in the Udaipur district of Rajasthan. The idea was simple: Seva
Mandir introduced time clocks that would stamp the date and time
when nurses were in the facility. Nurses were supposed to stamp their
time cards three times a day, to ensure that they arrived on time,
stayed around, and left on time. If such a scheme worked, and
increased the quality and quantity of health care provision, it would
be a strong illustration of the theory that there were easy solutions to
key problems in development.

In the event, the intervention revealed something very different.
Shortly after the program was implemented, there was a sharp
increase in nurse attendance. But this was very short lived. In a little
more than a year, the local health administration of the district
deliberately undermined the incentive scheme introduced by Seva
Mandir. Absenteeism was back to its usual level, yet there was a
sharp increase in “exempt days,” which meant that nurses were not
actually around — but this was officially sanctioned by the local health
administration. There was also a sharp increase in “machine
problems,” as the time clocks were broken. But Seva Mandir was
unable to replace them because local health ministers would not
cooperate.

Forcing nurses to stamp a time clock three times a day doesn’t seem
like such an innovative idea. Indeed, it is a practice used throughout
the industry, even Indian industry, and it must have occurred to
health administrators as a potential solution to their problems. It
seems unlikely, then, that ignorance of such a simple incentive
scheme was what stopped its being used in the first place. What
occurred during the program simply confirmed this. Health
administrators sabotaged the program because they were in cahoots

with the nurses and complicit in the endemic absenteeism problems.
They did not want an incentive scheme forcing nurses to turn up or
reducing their pay if they did not.

What this episode illustrates is a micro version of the difficulty of
implementing meaningful changes when institutions are the cause of
the problems in the first place. In this case, it was not corrupt
politicians or powerful businesses undermining institutional reform,
but rather, the local health administration and nurses who were able
to sabotage Seva Mandir’s and the development economists’ incentive
scheme. This suggests that many of the micro-market failures that are
apparently easy to fix may be illusory: the institutional structure that
creates market failures will also prevent implementation of
interventions to improve incentives at the micro level. Attempting to
engineer prosperity without confronting the root cause of the
problems — extractive institutions and the politics that keeps them in
place — is unlikely to bear fruit.

The Failure of Foreign Aid

Following the September 11, 2001, attacks by A1 Qaeda, U.S.-led
forces swiftly toppled the repressive Taliban regime in Afghanistan,
which was harboring and refusing to hand over key members of A1
Qaeda. The Bonn Agreement of December 2001 between leaders of
the former Afghan mujahideen who had cooperated with the U.S.
forces and key members of the Afghan diaspora, including Hamid
Karzai, created a plan for the establishment of a democratic regime. A
first step was the nationwide grand assembly, the Loya Jirga, which
elected Karzai to lead the interim government. Things were looking
up for Afghanistan. A majority of the Afghan people were longing to
leave the Taliban behind. The international community thought that
all that Afghanistan needed now was a large infusion of foreign aid.
Representatives from the United Nations and several leading NGOs
soon descended on the capital, Kabul.

What ensued should not have been a surprise, especially given the
failure of foreign aid to poor countries and failed states over the past

five decades. Surprise or not, the usual ritual was repeated. Scores of
aid workers and their entourages arrived in town with their own
private jets, NGOs of all sorts poured in to pursue their own agendas,
and high-level talks began between governments and delegations
from the international community. Billions of dollars were now
coming to Afghanistan. But little of it was used for building
infrastructure, schools, or other public services essential for the
development of inclusive institutions or even for restoring law and
order. While much of the infrastructure remained in tatters, the first
tranche of the money was used to commission an airline to shuttle
around UN and other international officials. The next thing they
needed were drivers and interpreters. So they hired the few English-
speaking bureaucrats and the remaining teachers in Afghan schools to
chauffeur and chaperone them around, paying them multiples of
current Afghan salaries. As the few skilled bureaucrats were shunted
into jobs servicing the foreign aid community, the aid flows, rather
than building infrastructure in Afghanistan, started by undermining
the Afghan state they were supposed to build upon and strengthen.

Villagers in a remote district in the central valley of Afghanistan
heard a radio announcement about a new multimillion-dollar
program to restore shelter to their area. After a long while, a few
wooden beams, carried by the trucking cartel of Ismail Khan, famous
former warlord and member of the Afghan government, were
delivered. But they were too big to be used for anything in the
district, and the villagers put them to the only possible use: firewood.
So what had happened to the millions of dollars promised to the
villagers? Of the promised money, 20 percent of it was taken as UN
head office costs in Geneva. The remainder was subcontracted to an
NGO, which took another 20 percent for its own head office costs in
Brussels, and so on, for another three layers, with each party taking
approximately another 20 percent of what was remaining. The little
money that reached Afghanistan was used to buy wood from western
Iran, and much of it was paid to Ismail Khan’s trucking cartel to cover
the inflated transport prices. It was a bit of a miracle that those
oversize wooden beams even arrived in the village.

What happened in the central valley of Afghanistan is not an
isolated incident. Many studies estimate that only about 10 or at most
20 percent of aid ever reaches its target. There are dozens of ongoing
fraud investigations into charges of UN and local officials siphoning
off aid money. But most of the waste resulting from foreign aid is not
fraud, just incompetence or even worse: simply business as usual for
aid organizations.

The Afghan experience with aid was in fact probably a qualified
success compared to others. Throughout the last five decades,
hundreds of billions of dollars have been paid to governments around
the world as “development” aid. Much of it has been wasted in
overhead and corruption, just as in Afghanistan. Worse, a lot of it
went to dictators such as Mobutu, who depended on foreign aid from
his Western patrons both to buy support from his clients to shore up
his regime and to enrich himself. The picture in much of the rest of
sub-Saharan Africa was similar. Humanitarian aid given for
temporary relief in times of crises, for example, most recently in Haiti
and Pakistan, has certainly been more useful, even though its
delivery, too, has been marred in similar problems.

Despite this unflattering track record of “development” aid, foreign
aid is one of the most popular policies that Western governments,
international organizations such as the United Nations, and NGOs of
different ilk recommend as a way of combating poverty around the
world. And of course, the cycle of the failure of foreign aid repeats
itself over and over again. The idea that rich Western countries
should provide large amounts of “developmental aid” in order to
solve the problem of poverty in sub-Saharan Africa, the Caribbean,
Central America, and South Asia is based on an incorrect
understanding of what causes poverty. Countries such as Afghanistan
are poor because of their extractive institutions — which result in lack
of property rights, law and order, or well-functioning legal systems
and the stifling dominance of national and, more often, local elites
over political and economic life. The same institutional problems
mean that foreign aid will be ineffective, as it will be plundered and
is unlikely to be delivered where it is supposed to go. In the worst-

case scenario, it will prop up the regimes that are at the very root of
the problems of these societies. If sustained economic growth depends
on inclusive institutions, giving aid to regimes presiding over
extractive institutions cannot be the solution. This is not to deny that,
even beyond humanitarian aid, considerable good comes out of
specific aid programs that build schools in areas where none existed
before and that pay teachers who would otherwise go unpaid. While
much of the aid community that poured into Kabul did little to
improve life for ordinary Afghans, there have also been notable
successes in building schools, particularly for girls, who were entirely
excluded from education under the Taliban and even before.

One solution — which has recently become more popular, partly
based on the recognition that institutions have something to do with
prosperity and even the delivery of aid — is to make aid “conditional.”
According to this view, continued foreign aid should depend on
recipient governments meeting certain conditions — for example,
liberalizing markets or moving toward democracy. The George W.
Bush administration undertook the biggest step toward this type of
conditional aid by starting the Millennium Challenge Accounts, which
made future aid payments dependent on quantitative improvements
in several dimensions of economic and political development. But the
effectiveness of conditional aid appears no better than the
unconditional kind. Countries failing to meet these conditions
typically receive as much aid as those that do. There is a simple
reason: they have a greater need for aid of either the developmental
or humanitarian kind. And quite predictably, conditional aid seems to
have little effect on a nation’s institutions. After all, it would have
been quite surprising for somebody such as Siaka Stevens in Sierra
Leone or Mobutu in the Congo suddenly to start dismantling the
extractive institutions on which he depended just for a little more
foreign aid. Even in sub-Saharan Africa, where foreign aid is a
significant fraction of many governments’ total budget, and even after
the Millennium Challenge Accounts, which increased the extent of
conditionality, the amount of additional foreign aid that a dictator
can obtain by undermining his own power is both small and not

worth the risk either to his continued dominance over the country or
to his life.

But all this does not imply that foreign aid, except the
humanitarian kind, should cease. Putting an end to foreign aid is
impractical and would likely lead to additional human suffering. It is
impractical because citizens of many Western nations feel guilt and
unease about the economic and humanitarian disasters around the
world, and foreign aid makes them believe that something is being
done to combat the problems. Even if this something is not very
effective, their desire for doing it will continue, and so will foreign
aid. The enormous complex of international organizations and NGOs
will also ceaselessly demand and mobilize resources to ensure the
continuation of the status quo. Also, it would be callous to cut the aid
given to the neediest nations. Yes, much of it is wasted. But if out of
every dollar given to aid, ten cents makes it to the poorest people in
the world, that is ten cents more than they had before to alleviate the
most abject poverty, and it might still be better than nothing.

There are two important lessons here. First, foreign aid is not a very
effective means of dealing with the failure of nations around the
world today. Far from it. Countries need inclusive economic and
political institutions to break out of the cycle of poverty. Foreign aid
can typically do little in this respect, and certainly not with the way
that it is currently organized. Recognizing the roots of world
inequality and poverty is important precisely so that we do not pin
our hopes on false promises. As those roots lie in institutions, foreign
aid, within the framework of given institutions in recipient nations,
will do little to spur sustained growth. Second, since the development
of inclusive economic and political institutions is key, using the
existing flows of foreign aid at least in part to facilitate such
development would be useful. As we saw, conditionality is not the
answer here, as it requires existing rulers to make concessions.
Instead, perhaps structuring foreign aid so that its use and
administration bring groups and leaders otherwise excluded from
power into the decision-making process and empowering a broad
segment of population might be a better prospect.

Empowerment

May 12, 1978, seemed as if it were going to be a normal day at the
Scania truck factory in the city of Sao Bernardo in the Brazilian state
of Sao Paulo. But the workers were restless. Strikes had been banned
in Brazil since 1964, when the military overthrew the democratic
government of President Joao Goulart. But news had just broken that
the government had been fixing the national inflation figures so that
the rise in the cost of living had been underestimated. As the 7:00
a.m. shift began, workers put down their tools. At 8:00 a.m., Gilson
Menezes, a union organizer working at the plant, called the union.
The president of the Sao Bernardo Metalworkers was a thirty-three-
year-old activist called Luiz Inacio Lula da Silva (“Lula”). By noon
Lula was at the factory. When the company asked him to persuade
the employees to go back to work, he refused.

The Scania strike was the first in a wave of strikes that swept across
Brazil. On the face of it these were about wages, but as Lula later
noted,

I think we can’t separate economic and political factors....

The ... struggle was over wages, but in struggling for
wages, the working class won a political victory.

The resurgence of the Brazilian labor movement was just part of a
much broader social reaction to a decade and a half of military rule.
The left-wing intellectual Fernando Henrique Cardoso, like Lula
destined to become president of Brazil after the re-creation of
democracy, argued in 1973 that democracy would be created in
Brazil by the many social groups that opposed the military coming
together. He said that what was needed was a “reactivation of civil
society ... the professional associations, the trade unions, the
churches, the student organizations, the study groups and the
debating circles, the social movements” — in other words, a broad
coalition with the aim of re-creating democracy and changing
Brazilian society.

The Scania factory heralded the formation of this coalition. By late

1978, Lula was floating the idea of creating a new political party, the
Workers’ Party. This was to be the party not just of trade unionists,
however. Lula insisted that it should be a party for all wage earners
and the poor in general. Here the attempts of union leaders to
organize a political platform began to coalesce with the many social
movements that were springing up. On August 18, 1979, a meeting
was held in Sao Paulo to discuss the formation of the Workers’ Party,
which brought together former opposition politicians, union leaders,
students, intellectuals, and people representing one hundred diverse
social movements that had begun to organize in the 1970s across
Brazil. The Workers’ Party, launched at the Sao Judas Tadeo
restaurant in Sao Bernardo in October 1979, would come to represent
all these diverse groups.

The party quickly began to benefit from the political opening that
the military was reluctantly organizing. In the local elections of 1982,
it ran candidates for the first time, and won two races for mayor.
Throughout the 1980s, as democracy was gradually re-created in
Brazil, the Workers’ Party began to take over more and more local
governments. By 1988 it controlled the governments in thirty-six
municipalities, including large cities such as Sao Paulo and Porto
Alegre. In 1989, in the first free presidential elections since the
military coup, Lula won 16 percent of the vote in the first round as
the party’s candidate. In the runoff race with Fernando Collor, he won
44 percent.

In taking over many local governments, something that accelerated
in the 1990s, the Workers’ Party began to enter into a symbiotic
relationship with many local social movements. In Porto Alegre the
first Workers’ Party administration after 1988 introduced
“participatory budgeting,” which was a mechanism for bringing
ordinary citizens into the formulation of the spending priorities of the
city. It created a system that has become a world model for local
government accountability and responsiveness, and it went along
with huge improvements in public service provision and the quality
of life in the city. The successful governance structure of the party at
the local level mapped into greater political mobilization and success

at the national level. Though Lula was defeated by Fernando
Henrique Cardoso in the presidential elections of 1994 and 1998, he
was elected president of Brazil in 2002. The Workers’ Party has been
in power ever since.

The formation of a broad coalition in Brazil as a result of the
coming together of diverse social movements and organized labor has
had a remarkable impact on the Brazilian economy. Since 1990
economic growth has been rapid, with the proportion of the
population in poverty falling from 45 percent to 30 percent in 2006.
Inequality, which rose rapidly under the military, has fallen sharply,
particularly after the Workers’ Party took power, and there has been a
huge expansion of education, with the average years of schooling of
the population increasing from six in 1995 to eight in 2006. Brazil
has now become part of the BRIC nations (Brazil, Russia, India, and
China), the first Latin American country actually to have weight in
international diplomatic circles.

The rise of Brazil since the 1970s was not engineered by economists of
international institutions instructing Brazilian policymakers on how
to design better policies or avoid market failures. It was not achieved
with injections of foreign aid. It was not the natural outcome of
modernization. Rather, it was the consequence of diverse groups of
people courageously building inclusive institutions. Eventually these
led to more inclusive economic institutions. But the Brazilian
transformation, like that of England in the seventeenth century, began
with the creation of inclusive political institutions. But how can
society build inclusive political institutions?

History, as we have seen, is littered with examples of reform
movements that succumbed to the iron law of oligarchy and replaced
one set of extractive institutions with even more pernicious ones. We
have seen that England in 1688, France in 1789, and Japan during
the Meiji Restoration of 1868 started the process of forging inclusive
political institutions with a political revolution. But such political
revolutions generally create much destruction and hardship, and their

success is far from certain. The Bolshevik Revolution advertised its
aim as replacing the exploitative economic system of tsarist Russia
with a more just and efficient one that would bring freedom and
prosperity to millions of Russians. Alas, the outcome was the
opposite, and much more repressive and extractive institutions
replaced those of the government the Bolsheviks overthrew. The
experiences in China, Cuba, and Vietnam were similar. Many
noncommunist, top-down reforms fared no better. Nasser vowed to
build a modern egalitarian society in Egypt, but this led only to Hosni
Mubarak’s corrupt regime, as we saw in chapter 13. Robert Mugabe
was viewed by many as a freedom fighter ousting Ian Smith’s racist
and highly extractive Rhodesian regime. But Zimbabwe’s institutions
became no less extractive, and its economic performance has been
even worse than before independence.

What is common among the political revolutions that successfully
paved the way for more inclusive institutions and the gradual
institutional changes in North America, in England in the nineteenth
century, and in Botswana after independence — which also led to
significant strengthening of inclusive political institutions — is that
they succeeded in empowering a fairly broad cross-section of society.
Pluralism, the cornerstone of inclusive political institutions, requires
political power to be widely held in society, and starting from
extractive institutions that vest power in a narrow elite, this requires
a process of empowerment. This, as we emphasized in chapter 7, is
what sets apart the Glorious Revolution from the overthrow of one
elite by another. In the case of the Glorious Revolution, the roots of
pluralism were in the overthrow of James II by a political revolution
led by a broad coalition consisting of merchants, industrialists, the
gentry, and even many members of the English aristocracy not allied
with the Crown. As we have seen, the Glorious Revolution was
facilitated by the prior mobilization and empowerment of a broad
coalition, and more important, it in turn led to the further
empowerment of an even broader segment of society than what came
before — even though clearly this segment was much less broad than
the entire society, and England would remain far from a true

democracy for more than another two hundred years. The factors
leading to the emergence of inclusive institutions in the North
American colonies were also similar, as we saw in the first chapter.
Once again, the path starting in Virginia, Carolina, Maryland, and
Massachusetts and leading up to the Declaration of Independence and
to the consolidation of inclusive political institutions in the United
States was one of empowerment for increasingly broader segments in
society.

The French Revolution, too, is an example of empowerment of a
broader segment of society, which rose up against the ancien regime in
France and managed to pave the way for a more pluralistic political
system. But the French Revolution, especially the interlude of the
Terror under Robespierre, a repressive and murderous regime, also
illustrates how the process of empowerment is not without its pitfalls.
Ultimately, however, Robespierre and his Jacobin cadres were cast
aside, and the most important inheritance from the French Revolution
became not the guillotine but the far-ranging reforms that the
revolution implemented in France and other parts of Europe.

There are many parallels between these historical processes of
empowerment and what took place in Brazil starting in the 1970s.
Though one root of the Workers’ Party is the trade union movement,
right from its early days, leaders such as Lula, along with the many
intellectuals and opposition politicians who lent their support to the
party, sought to make it into a broad coalition. These impulses began
to fuse with local social movements all over the country, as the party
took over local governments, encouraging civic participation and
causing a sort of revolution in governance throughout the country. In
Brazil, in contrast with England in the seventeenth century or France
at the turn of the eighteenth century, there was no radical revolution
igniting the process of transforming political institutions at one fell
swoop. But the process of empowerment that started in the factories
of Sao Bernardo was effective in part because it translated into
fundamental political change at the national level — for example, the
transitioning out of military rule to democracy. More important,
empowerment at the grass-roots level in Brazil ensured that the

transition to democracy corresponded to a move toward inclusive
political institutions, and thus was a key factor in the emergence of a
government committed to the provision of public services,
educational expansion, and a truly level playing field. As we have
seen, democracy is no guarantee that there will be pluralism. The
contrast of the development of pluralistic institutions in Brazil to the
Venezuelan experience is telling in this context. Venezuela also
transitioned to democracy after 1958, but this happened without
empowerment at the grassroots level and did not create a pluralistic
distribution of political power. Instead, corrupt politics, patronage
networks, and conflict persisted in Venezuela, and in part as a result,
when voters went to the polls, they were even willing to support
potential despots such as Hugo Chavez, most likely because they
thought he alone could stand up to the established elites of
Venezuela. In consequence, Venezuela still languishes under
extractive institutions, while Brazil broke the mold.

What can be done to kick-start or perhaps just facilitate the process of
empowerment and thus the development of inclusive political
institutions? The honest answer of course is that there is no recipe for
building such institutions. Naturally there are some obvious factors
that would make the process of empowerment more likely to get off
the ground. These would include the presence of some degree of
centralized order so that social movements challenging existing
regimes do not immediately descend into lawlessness; some
preexisting political institutions that introduce a modicum of
pluralism, such as the traditional political institutions in Botswana, so
that broad coalitions can form and endure; and the presence of civil
society institutions that can coordinate the demands of the population
so that opposition movements can neither be easily crushed by the
current elites nor inevitably turn into a vehicle for another group to
take control of existing extractive institutions. But many of these
factors are historically predetermined and change only slowly. The
Brazilian case illustrates how civil society institutions and associated

party organizations can be built from the ground up, but this process
is slow, and how successful it can be under different circumstances is
not well understood.

One other actor, or set of actors, can play a transformative role in
the process of empowerment: the media. Empowerment of society at
large is difficult to coordinate and maintain without widespread
information about whether there are economic and political abuses by
those in power. We saw in chapter 11 the role of the media in
informing the public and coordinating their demands against forces
undermining inclusive institutions in the United States. The media
can also play a key role in channeling the empowerment of a broad
segment of society into more durable political reforms, again as
illustrated in our discussion in chapter 11, particularly in the context
of British democratization.

Pamphlets and books informing and galvanizing people played an
important role during the Glorious Revolution in England, the French
Revolution, and the march toward democracy in nineteenth-century
Britain. Similarly, media, particularly new forms based on advances
in information and communication technology, such as Web blogs,
anonymous chats, Facebook, and Twitter, played a central role in
Iranian opposition against Ahmadinejad’s fraudulent election in 2009
and subsequent repression, and they seem to be playing a similarly
central role in the Arab Spring protests that are ongoing as this
manuscript is being completed.

Authoritarian regimes are often aware of the importance of a free
media, and do their best to fight it. An extreme illustration of this
comes from Alberto Fujimori’s rule in Peru. Though originally
democratically elected, Fujimori soon set up a dictatorial regime in
Peru, mounting a coup while still in office in 1992. Thereafter,
though elections continued, Fujimori built a corrupt regime and ruled
through repression and bribery. In this he relied heavily on his right-
hand man, Valdimiro Montesinos, who headed the powerful national
intelligence service of Peru. Montesinos was an organized man, so he
kept good records of how much the administration paid different
individuals to buy their loyalty, even videotaping many actual acts of

bribery. There was a logic to this. Beyond just recordkeeping, this
evidence made sure that the accomplices were now on record and
would be considered as guilty as Fujimori and Montesinos. After the
fall of the regime, these records fell into the hands of journalists and
authorities. The amounts are revealing about the value of the media
to a dictatorship. A Supreme Court judge was worth between $5,000
and $10,000 a month, and politicians in the same or different parties
were paid similar amounts. But when it came to newspapers and TV
stations, the sums were in the millions. Fujimori and Montesinos paid
$9 million on one occasion and more than $10 million on another to
control TV stations. They paid more than $1 million to a mainstream
newspaper, and to other newspapers they paid any amount between
$3,000 and $8,000 per headline. Fujimori and Montesinos thought
that controlling the media was much more important than controlling
politicians and judges. One of Montesinos’s henchmen, General Bello,
summed this up in one of the videos by stating, “If we do not control
the television we do not do anything.”

The current extractive institutions in China are also crucially
dependent on Chinese authorities’ control of the media, which, as we
have seen, has become frighteningly sophisticated. As a Chinese
commentator summarized, “To uphold the leadership of the Party in
political reform, three principles must be followed: that the Party
controls the armed forces; the Party controls cadres; and the Party
controls the news.”

But of course a free media and new communication technologies
can help only at the margins, by providing information and
coordinating the demands and actions of those vying for more
inclusive institutions. Their help will translate into meaningful change
only when a broad segment of society mobilizes and organizes in
order to effect political change, and does so not for sectarian reasons
or to take control of extractive institutions, but to transform
extractive institutions into more inclusive ones. Whether such a
process will get under way and open the door to further
empowerment, and ultimately to durable political reform, will
depend, as we have seen in many different instances, on the history of

economic and political institutions, on many small differences that
matter and on the very contingent path of history.

ACKNOWLEDGMENTS

This book is the culmination of fifteen years of collaborative research,

and along the way we have accumulated a great deal of practical and
intellectual debts. Our greatest debt is to our long-term collaborator
Simon Johnson, who coauthored many of the key scientific papers
that shaped our understanding of comparative economic
development.

Our other coauthors, with whom we have worked on related
research projects, played a significant role in the development of our
views, and we would like to particularly thank in this capacity
Philippe Aghion, Jean-Marie Baland, Maria Angelica Bautista, Davide
Cantoni, Isaias Chaves, Jonathan Conning, Melissa Dell, Georgy
Egorov, Leopoldo Fergusson, Camilo Garda- Jimeno, Tarek Hassan,
Sebastian Mazzuca, Jeffrey Nugent, Neil Parsons, Steve Pincus, Pablo
Querubm, Rafael Santos, Konstantin Sonin, Davide Ticchi, Ragnar
Torvik, Juan Fernando Vargas, Thierry Verdier, Andrea Vindigni, Alex
Wolitzky, Pierre Yared, and Fabrizio Zilibotti.

Many other people played very important roles in encouraging,
challenging, and critiquing us over the years. We would particularly
like to thank Lee Alston, Abhijit Banerjee, Robert Bates, Timothy
Besley, John Coatsworth, Jared Diamond, Richard Easterlin, Stanley
Engerman, Peter Evans, Jeff Frieden, Peter Gourevitch, Stephen
Haber, Mark Harrison, Elhanan Helpman, Peter Lindert, Karl Ove
Moene, Dani Rodrik, and Barry Weingast.

Two people played a particularly significant role in shaping our
views and encouraging our research, and we would like to take this
opportunity to express our intellectual debt and our sincere gratitude
to them: Joel Mokyr, and Ken Sokoloff, who unfortunately passed
away before this book was written. Ken is sorely missed by us both.

We are also very grateful to the scholars who attended a conference

we organized in February 2010 on an early version of our book
manuscript at the Institute for Quantitative Social Science at Harvard.
We would particularly like to thank the co-organizers, Jim Alt and
Ken Shepsle, and our discussants at the conference: Robert Allen,
Abhijit Banerjee, Robert Bates, Stanley Engerman, Claudia Goldin,
Elhanan Helpman, Joel Mokyr, Ian Morris, §evket Pamuk, Steve
Pincus, and Peter Temin. We are also grateful to Melissa Dell, Jesus
Fernandez-Villaverde, Sandor Laszlo, Suresh Naidu, Roger Owen, Dan
Trefler, Michael Walton, and Noam Yuchtman, who gave us extensive
comments at the conference and at many other times.

We are also grateful to Charles Mann, Leandro Prados de la
Escosura, and David Webster for their expert advice.

During much of the process of researching and writing this book we
were both members of the Canadian Institute for Advanced Research’s
(CIFAR) program on Institutions, Organizations, and Growth. We
presented research related to this book many times at CIFAR meetings
and have benefited hugely from the support of this wonderful
organization and the scholars that it brings together.

We also received comments from literally hundreds of people in
various seminars and conferences on the material developed in this
book, and we apologize for failing to attribute properly any
suggestion, idea, or insight that we got from those presentations and
discussions.

We are also very grateful to Maria Angelica Bautista, Melissa Dell,
and Leander Heldring for their superb research assistance on this
project.

Last, but certainly not least, we have been very fortunate to have a
wonderful, insightful, and extremely supportive editor, John
Mahaney. John’s comments and suggestions have greatly improved
our book, and his support and enthusiasm for the project made the
last year and a half much more pleasant and less taxing than it might
have been.

BIBLIOGRAPHICAL ESSAY AND SOURCES

Preface

Mohamed ElBaradei’s views can be found at
twitter.eom/# !/ElBaradei.

Mosaab El Shami and Noha Hamed quotes are from Yahoo! news
2/6/2011, at news. yahoo. com/s/
yblog_exclusive/201 1 0206/ts_yblog_exclusive/
egyptian-voices-from-tahrir-square.

On the twelve immediate demands posted on Wael Khalil’s blog,
see alethonews.wordpress.com/2011/02/27/egypt-reviewing-the-
demands/.

Reda Metwaly is quoted on A1 Jazeera, 2/1/2011, at
english.aljazeera.net/news/
middleeast/201 1/02/201 1212597913527.html.

Chapter 1 : So Close and Yet So Different

A good discussion of the Spanish exploration of the Rio de La Plata
is Rock (1992), chap. 1. On the discovery and colonization of the
Guarani, see Ganson (2003). The quotations from de Sahagun are
from de Sahagun (1975), pp. 47-49. Gibson (1963) is fundamental on
the Spanish conquest of Mexico and the institutions they structured.
The quotations from de las Casas come from de las Casas (1992), pp.
39, 117-18, and 107, respectively.

On Pizarro in Peru, see Hemming (1983). Chaps. 1-6 cover the
meeting at Cajamarca and the march south and the capture of the
Inca capital, Cuzco. See Hemming (1983), chap. 20, on de Toledo.
Bakewell (1984) gives an overview of the functioning of the Potosi
mita, and Dell (2010) provides statistical evidence that shows how it
has had persistent effects over time.

The quote from Arthur Young is reproduced from Sheridan (1973),
p. 8. There are many good books that describe the early history of
Jamestown: for example, Price (2003), and Kupperman (2007). Our
treatment is heavily influenced by Morgan (1975) and Galenson
(1996). The quote from Anas Todkill comes from p. 38 of Todkill
(1885). The quotes from John Smith are from Price (2003), p. 77
(“Victuals ...”), p. 93 (“If your king ...”), and p. 96 (“When you
send ...”). The Charter of Maryland, the Fundamental Constitutions of
Carolina, and other colonial constitutions have been put on the
Internet by Yale University’s Avalon Project, at
avalon.law.yale.edu/17th_century.

Bakewell (2009), chap. 14, discusses the independence of Mexico
and the constitution. See Stevens (1991) and Knight (2011) on
postindependence political instability and presidents. Coatsworth
(1978) is the seminal paper on the evidence on economic decline in
Mexico after independence. Haber (2010) presents the comparison of
the development of banking in Mexico and the United States. Sokoloff
(1988) and Sokoloff and Khan (1990) provide evidence on the social
background of innovators in the United States who filed patents. See

Israel (2000) for a biography of Thomas Edison. Haber, Maurer, and
Razo (2003) proposes an interpretation of the political economy of
the regime of Porfirio Diaz very much in the spirit of our discussion.
Haber, Klein, Maurer, and Middlebrook (2008) extend this treatment
of Mexico’s political economy into the twentieth century. On the
differential allocation of frontier lands in North and Latin America,
see Nugent and Robinson (2010) and Garcia- Jimeno and Robinson
(2011). Hu-DeHart (1984) discusses the deportation of the Yaqui
people in chap. 6. On the fortune of Carlos Slim and how it was
made, see Relea (2007) and Martinez (2002).

Our interpretation of comparative economic development of the
Americas builds on our own previous research with Simon Johnson,
particularly Acemoglu, Johnson, and Robinson (2001, 2002), and has
also been heavily influenced by Coatsworth (1978, 2008) and
Engerman and Sokoloff (1997).

Chapter 2 : Theories That Don’t Work

Jared Diamond’s views on world inequality are laid out in his book
Guns , Germs and Steel (1997). Sachs (2006) sets out his own version of
geographical determinism. Views about culture are widely spread
throughout the academic literature but have never been brought
together in one work. Weber (2002) argued that it was the Protestant
Reformation that explained why it was Europe that had the Industrial
Revolution. Landes (1999) proposed that Northern Europeans
developed a unique set of cultural attitudes that led them to work
hard, save, and be innovative. Harrison and Huntington, eds. (2000),
is a forceful statement of the importance of culture for comparative
economic development. The notion that there is some sort of superior
British culture or superior set of British institutions is widespread and
used to explain U.S. exceptionalism (Fisher, 1989) and also patterns
of comparative development more generally (La Porta, Lopez-de-
Silanes, and Shleifer, 2008). The works of Banfield (1958) and
Putnam, Leonardi, and Nanetti (1994) are very influential cultural
interpretations of how one aspect of culture, or “social capital,” as
they call it, makes the south of Italy poor. For a survey of how
economists use notions of culture, see Guiso, Sapienza, and Zingales
(2006). Tabellini (2010) examines the correlation between the extent
to which people trust each other in Western Europe and levels of
annual income per capita. Nunn and Wantchekon (2010) show how
the lack of trust and social capital in Africa is correlated with the
historical intensity of the slave trade.

The relevant history of the Kongo is presented in Hilton (1985) and
Thornton (1983). On the historical backwardness of African
technology, see the works of Goody (1971), Law (1980), and Austen
and Headrick (1983).

The definition of economics proposed by Robbins is from Robbins
(1935), p. 16.

The quote from Abba Lerner is in Lerner (1972), p. 259. The idea
that ignorance explains comparative development is implicit in most

economic analyses of economic development and policy reform: for
example, Williamson (1990); Perkins, Radelet, and Lindauer (2006);
and Aghion and Howitt (2009). A recent, forceful version of this view
is developed in Banerjee and Duflo (2011).

Acemoglu, Johnson, and Robinson (2001, 2002) provide a
statistical analysis of the relative role of institutions, geography, and
culture, showing that institutions dominate the other two types of
explanations in accounting for differences in per capita income today.

Chapter 3 : The Making of Prosperity and Poverty

The reconstruction of the meeting between Hwang Pyong-Won and
his brother is taken from James A. Foley’s interview of Hwang
transcribed in Foley (2003), pp. 197-203.

The notion of extractive institutions originates from Acemoglu,
Johnson, and Robinson (2001). The terminology of inclusive
institutions was suggested to us by Tim Besley. The terminology of
economic losers and the distinction between them and political losers
comes from Acemoglu and Robinson (2000b). The data on Barbados
comes from Dunn (1969). Our treatment of the Soviet economy relies
on Nove (1992) and Davies (1998). Allen (2003) provides an
alternative and more positive interpretation of Soviet economic
history.

In the social science literature there is a great deal of research
related to our theory and argument. See Acemoglu, Johnson, and
Robinson (2005b) for an overview of this literature and our
contribution to it. The institutional view of comparative development
builds on a number of important works. Particularly notable is the
work of North; see North and Thomas (1973), North (1982), North
and Weingast (1989), and North, Wallis, and Weingast (2009). Olson
(1984) also provided a very influential account of the political
economy of economic growth. Mokyr (1990) is a fundamental book
that links economic losers to comparative technological change in
world history. The notion of economic losers is very widespread in
social science as an explanation for why efficient institutional and
policy outcomes do not occur. Our interpretation, which builds on
Robinson (1998) and Acemoglu and Robinson (2000b, 2006b), differs
by emphasizing the idea that the most important barrier to the
emergence of inclusive institutions is elites’ fear that they will lose
their political power. Jones (2003) provides a rich comparative
history emphasizing similar themes, and Engerman and Sokoloffs
(1997) important work on the Americas also emphasizes these ideas.
A seminal political economy interpretation of African

underdevelopment was developed by Bates (1981, 1983, 1989),
whose work heavily influenced ours. Seminal studies by Dalton
(1965) and Killick (1978) emphasize the role of politics in African
development and particularly how the fear of losing political power
influences economic policy. The notion of political losers was
previously implicit in other theoretical work in political economy, for
instance, Besley and Coate (1998) and Bourguignon and Verdier
(2000). The role of political centralization and state institutions in
development has been most heavily emphasized by historical
sociologists following the work by Max Weber. Notable is the work of
Mann (1986, 1993), Migdal (1988), and Evans (1995). In Africa,
work on the connection between the state and development is
emphasized by Herbst (2000) and Bates (2001). Economists have
recently begun to contribute to this literature; for example, Acemoglu
(2005) and Besley and Persson (2011). Finally, Johnson (1982),
Haggard (1990), Wade (1990), and Amsden (1992) emphasized how
it was the particular political economy of East Asian nations that
allowed them to be so economically successful. Finley (1965) made a
seminal argument that slavery was responsible for the lack of
technological dynamism in the classical world.

The idea that growth under extractive institutions is possible but is
also likely to run out of steam is emphasized in Acemoglu (2008).

Chapter 4 : Small Differences and Critical Junctures

Benedictow (2004) provides a definitive overview of the Black
Death, though his assessments of how many people the plague killed
are controversial. The quotations from Boccaccio and Ralph of
Shrewsbury are reproduced from Horrox (1994). Hatcher (2008)
provides a compelling account of the anticipation and arrival of the
plague in England. The text of the Statute of Laborers is available
online from the Avalon Project, at

avalon. law.yale. edu/medieval/statlab. asp

The fundamental works on the impact of the Black Death on the
divergence of Eastern and Western Europe are North and Thomas
(1973) and particularly Brenner (1976), whose analysis of how the
initial distribution of political power affected the consequences of the
plague has greatly influenced our thinking. See DuPlessis (1997) on
the Second Serfdom in Eastern Europe. Conning (2010) and Acemoglu
and Wolitzky (2011) develop formalizations of Brenner’s thesis. The
quote from James Watt is reproduced from Robinson (1964), pp.
223-24.

In Acemoglu, Johnson, and Robinson (2005a) we first presented the
argument that it was the interaction between Atlantic trade and
initial institutional differences that led to the divergence of English
institutions and ultimately the Industrial Revolution. The notion of
the iron law of oligarchy is due to Michels (1962). The notion of a
critical juncture was first developed by Lipset and Rokkan (1967).

On the role of institutions in the long-run development of the
Ottoman Empire, the research of Owen (1981), Owen and Pamuk
(1999), and Pamuk (2006) is fundamental.

Chapter 5 : “I’ve Seen the Future, and It Works”

On Steffens’s mission to Russia and his words to Baruch, see
Steffens (1931), chap. 18, pp. 790-802. For the number of people
who starved in the 1930s, we use the figures of Davies and
Wheatcroft (2004). On the 1937 census numbers, see Wheatcroft and
Davies (1994a, 1994b). The nature of innovation in the Soviet
economy is studied in Berliner (1976). Our discussion of how
Stalinism, and particularly economic planning, really worked is based
on Gregory and Harrison (2005). On how writers of U.S. economics
textbooks continually got Soviet economic growth wrong, see Levy
and Peart (2009).

Our treatment and interpretation of the Lele and the Bushong is
based on the research of Douglas (1962, 1963) and Vansina (1978).

On the concept of the Long Summer, see Fagan (2003). An
accessible introduction to the Natufians and archaeological sites we
mention can be found in Mithen (2006) and Barker (2006). The
seminal work on Abu Hureyra is Moore, Hillman, and Legge (2000),
which documents how sedentary life and institutional innovation
appeared prior to farming. See Smith (1998) for a general overview of
the evidence that sedentary life preceded farming, and see Bar- Yosef
and Belfer-Cohen (1992) for the case of the Natufians. Our approach
to the Neolithic Revolution is inspired by Sahlins (1972), which also
has the anecdote about the Yir Yoront.

Our discussion of Maya history follows Martin and Grube (2000)
and Webster (2002). The reconstruction of the population history of
Copan comes from Webster, Freter, and Gonlin (2000). The number
of dated monuments is from Sidrys and Berger (1979).

Chapter 6 : Drifting Apart

The discussion of the Venetian case follows Puga and Trefler
(2010), and chaps. 8 and 9 of Lane (1973).

The material on Rome is contained in any standard history. Our
interpretation of Roman economic institutions follows Finlay (1999)
and Bang (2008). Our account of Roman decline follows Ward-
Perkins (2006) and Goldsworthy (2009). On institutional changes in
the late Roman Empire, see Jones (1964). The anecdotes about
Tiberius and Hadrian are from Finley (1999).

The evidence from shipwrecks was first used by Hopkins (1980).
See De Callatad (2005) and Jongman (2007) for an overview of this
and the Greenland Ice Core Project.

The Vindolanda tablets are available online at
vindolanda.csad.ox.ac.uk/. The quote we use comes from TVII Pub.
no.: 343.

The discussion of the factors that led to the decline of Roman
Britain follows Cleary (1989), chap. 4; Faulkner (2000), chap. 7; Dark
(1994), chap. 2.

On Aksum, see Munro-Hay (1991). The seminal work on European
feudalism and its origins is Bloch (1961); see Crummey (2000) on
Ethiopian feudalism. Phillipson (1998) makes the comparison
between the collapse of Aksum and the collapse of the Roman
Empire.

Chapter 7 : The Turning Point

The story of Lee’s machine and meeting with Queen Elizabeth I is
available at calverton.homestead.com/willlee.html.

Allen (2009b) presents the data on real wages using Diocletian’s
Edict on Maximum Prices.

Our argument about the causes of the Industrial Revolution is
highly influenced by the arguments made in North and Thomas
(1973), North and Weingast (1989), Brenner (1993), Pincus (2009),
and Pincus and Robinson (2010). These scholars in turn were inspired
by earlier Marxist interpretations of British institutional change and
the emergence of capitalism; see Dobb

(1963) and Hill (1961, 1980). See also Tawney’s (1941) thesis
about how the state building project of Henry VIII changed the
English social structure.

The text of the Magna Carta is available online at the Avalon
Project, at avalon.law.yale.edu/medieval/magframe.asp.

Elton (1953) is the seminal work on the development of state
institutions under Henry VIII, and Neale (1971) relates these to the
evolution of parliament.

On the Peasants’ Revolt, see Hilton (2003). The quote from Hill on
monopolies is from Hill (1961), p. 25. On Charles I’s period of
“personal rule,” we follow Sharp (1992). Our evidence on how
different groups and regions sided either for or against Parliament
comes from Brunton and Pennington (1954), Hill (1961), and Stone
(2001). Pincus (2009) is fundamental on the Glorious Revolution and
discusses many of the specific changes in policies and economic
institutions; for example, the repeal of the Hearth Tax and the
creation of the Bank of England. See also Pincus and Robinson
(2010). Pettigrew (2007, 2009) discusses the attack on monopolies,
including the Royal African Company, and our data on petitioning
comes from his papers. Knights (2010) emphasizes the political
importance of petitioning. Our information on Hoare’s Bank comes
from Temin and Voth (2008).

Our information about Superviser Cowperthwaite and the excise
tax bureaucracy comes from Brewer (1988).

Our overview of the economic history of the Industrial Revolution
rests on Mantoux (1961), Daunton (1995), Allen (2009a), and Mokyr
(1990, 2009), who provide details on the famous inventors and
inventions we discuss. The story about the Baldwyn family is from
Bogart and Richardson (2009, 2011), who stress the connection
between the Glorious Revolution, the reorganization of property
rights, and the construction of roads and canals. On the Calicoe Acts
and Manchester Acts, see O’Brien, Griffiths, and Hunt (1991), which
is the source of the quotes from the legislation. On the dominance of
new people in industry, see Daunton (1995), chap. 7, and Crouzet
(1985).

Our account of why the major institutional changes first took place
in England is based on Acemoglu, Johnson, and Robinson (2005a)
and Brenner (1976). The data on the number of independent
merchants and their political preferences come from Zahedieh (2010).

Chapter 8 : Not On Our Turf

On the opposition to the printing press in the Ottoman Empire, see
Savage-Smith (2003) pp. 656-59. Comparative historical literacy
comes from Easterlin (1981).

Our discussion of political institutions of Spain follows Thompson
(1994a, 1994b). For evidence on the economic decline of Spain over
this period, see Nogal and Prados de la Escosura (2007).

Our discussion of the impediments to economic development in
Austria-Hungary follows Blum (1943), Freudenberger (1967), and
Gross (1973). The quotation from Maria Theresa comes from
Freudenberger, p. 495. All other quotations from Count Hartig and
Francis I are from Blum. Francis’s reply to the delegates from the
Tyrol is quoted from Jaszi (1929), pp. 80-81. The comment of
Friedrich von Gentz to Robert Owen is also quoted from Jaszi (1929),
p. 80. The experience of the Rothschilds in Austria is discussed in
chap. 2 of Corti (1928).

Our analysis of Russia follows Gerschenkron (1970). The quotation
from Kropotkin is from p. 60 of the 2009 edition of his book. The
conversation between Nicholas and Mikhail is quoted from Saunders
(1992), p. 117. Kankrin’s quote on railways is in Owen (1991), pp.
15-16.

The speech by Nicholas to the manufacturers is reproduced from
Pintner 967), p. 100.

The quote from A. A. Zakrevskii is from Pintner (1967), p. 235.

On Admiral Zheng, see Dreyer (2007). The economic history of
early Modern China is covered by Myers and Wang (2002). The quote
from T’ang Chen is quoted from Myers and Wang, pp. 564-65.

See Zewde (2002) for an overview of the relevant Ethiopian
history. The data on how extractive Ethiopia has been historically
come from Pankhurst (1961), as do all the quotes we reproduce here.

Our description of Somali institutions and history follows Lewis
(1961, 2002). The heer of the Hassan Ugaas is reproduced on p.177 of
Lewis (1961); our description of a feud comes from chap. 8 of Lewis

(1961), where he reports many other examples. On the Kingdom of
Taqali and writing, see Ewald (1988).

Chapter 9 : Reversing Development

Our discussion of the takeover of Ambon and Banda by the Dutch
East India Company and the company’s negative effect on the
development of Southeast Asia follows Hanna (1978) and particularly
Reid (1993), chap. 5. The quotes from Reid on Tome Pires are from p.
271; the Dutch factor in Maguindanao, p. 299; the sultan of
Maguindanao, pp. 299-300. Data on the impact of the Dutch East
India Company on the price of spices come from O’Rourke and
Williamson (2002).

A definitive overview of slavery in African society and the impact
of the slave trade is Lovejoy (2000). Lovejoy, p. 47, Table 31, reports
consensus estimates of the extent of the slave trade. Nunn (2008)
provided the first quantitative estimates of the impact of the slave
trade on African economic institutions and economic growth. The
data on firearms and gunpowder imports are from Inikori (1977). The
testimony of Francis Moore is quoted from Lovejoy (2000), pp. 89-
90. Law (1977) is a seminal study of the expansion of the Oyo state.
The estimates of the impact of the slave trade on population in Africa
are taken from Manning (1990). Lovejoy (2000), chap. 8, the essays
in Law (1995), and the important book of Austin (2005) are the basis
for our discussion of the analysis of the period of “legitimate
commerce.” Data on the proportion of Africans who were slaves in
Africa comes from Lovejoy (2000), e.g., p. 192, Table 9.2.

Data on labor in Liberia is from Clower, Dalton, Harwitz, and
Walters (1966).

The dual economy idea was developed by Lewis (1954). Fergusson
(2010) develops a mathematical model of the dual economy. The
notion that this was a creation of colonialism was first proposed in
the seminal collection of essays edited by Palmer and Parsons (1977).
Our account of South Africa is based on Bundy (1979) and Feinstein
(2005).

The Moravian missionary is quoted in Bundy (1979), p. 46, and
John Hemming is quoted in Bundy, p. 72. The spread of land

ownership in Griqualand East is from Bundy, p. 89; the exploits of
Stephen Sonjica are from Bundy, p. 94; the quote from Matthew Blyth
is from p. 97; and the quote from a European observer in Fingoland
1884 is from Bundy, pp. 100-101. George Albu is quoted in Feinstein
(2005), p. 63; secretary for native affairs is quoted from Feinstein, p.
45; and Verwoerd is quoted from Feinstein, p. 159. Data on the real
wages of African gold miners are from p. 66 of Wilson (1972). G.
Findlay is quoted in Bundy (1979), p. 242.

The notion that the development of the rich countries of the West is
the mirror image of the underdevelopment of the rest of the world
was originally developed by Wallertsein (1974-2011), though he
emphasizes very different mechanisms than we do.

Chapter 10 : The Diffusion of Prosperity

This chapter builds heavily on our previous research with Simon
Johnson and Davide Cantoni: Acemoglu, Johnson, and Robinson
(2002) and Acemoglu, Cantoni, Johnson, and Robinson (2010, 2011).

Our discussion of the development of early institutions in Australia
follows the seminal work of Hirst (1983, 1988, 2003) and Neal
(1991). The original manuscript of the writ issued to Judge Collins is
available (thanks to the Macquarie University Law School in
Australia) at

www.law.mq.edu.au/scnsw/html/Cable%20v%20Sinclair,%201788.ht

Macarthur’s characterization of Wentworth’s supporters is quoted
from Melbourne (1963), pp. 131-32.

Our discussion of the origins of the Rothschilds follows Ferguson
(1998); Mayer Rothschild’s remark to his son is reproduced from
Ferguson, p. 76.

Our discussion of the impact of the French on European institutions
is taken from Acemoglu, Cantoni, Johnson, and Robinson (2010,
2011) and the references therein. See Doyle (2002) for a standard
overview of the French Revolution. Information on the feudal dues in
Nassau-Usingen is from Lenger (2004), p. 96. Ogilivie (2011)
overviews the historical impact of guilds on European development.

For a treatment of the life of (Okubo Toshimichi, see Iwata (1964).
Sakamoto Ryuma’s eight-point plan is reproduced from Jansen
(2000), p. 310.

Chapter 11 : The Virtuous Circle

Our discussion of the Black Act follows Thompson (1975). Baptist
Nunn’s report of June 27 is from Thompson (1975), pp. 65-66. The
other quotes are from Thompson’s section on the rule of law, pp.
258-69, which is well worth reading in its entirety.

Our approach to democratization in England is based on Acemoglu
and Robinson (2000a, 2001, and 2006a). Earl Grey’s speech is quoted
from Evans (1996), p. 223. Stephens’s comment about democracy is
quoted in Briggs (1959), p. 34. Thompson’s quote is from Thompson
(1975), p. 269.

The entire text of the People’s Charter can be found in Cole and
Filson (1951) and at web.bham.ac.uk/1848/document/peoplech.htm.

The quote from Burke is taken from Burke (1790/1969), p. 152.

Lindert (2004, 2009) is a seminal treatment of the coevolution of
democracy and public policy over the past two hundred years.

Keyssar (2009) is a seminal introduction to the evolution of
political rights in the United States. Vanderbilt is quoted in Josephson
(1934), p. 15. The text of Roosevelt’s address is at www.theodore-
roosevelt.com/sotul .html.

The quote from Woodrow Wilson is from Wilson (1913), p. 286.

The text of President Roosevelt’s Fireside Chat can be found at
miller-center, org/scripps/archive/speeches/detail/3309.

Data on the relative tenure of Supreme Court justices in Argentina
and the United States is presented in Iaryczower, Spiller, and
Tommasi (2002). Helmke (2004) discusses the history of court
packing in Argentina and quotes Justice Carlos Fayt.

Chapter 12 : The Vicious Circle

This chapter heavily relies on our theoretical and empirical
research on institutional persistence, particularly Acemoglu, Johnson,
and Robinson (2005b) and Acemoglu and Robinson (2008a). Heath
(1972) and Kelley and Klein (1980) made a seminal application of the
iron law of oligarchy to the 1952 Bolivian Revolution.

The quote from the British parliamentary papers is reproduced from
p. 15 of House of Commons (1904). The early political history of
postindependence Sierra Leone is well told in Cartwright (1970).
Though interpretations differ as to why Siaka Stevens pulled up the
railway line, the salient one is that he did this to isolate Mendeland.
In this we follow Abraham and Sesay (1993), p. 120; Richards (1996),
pp. 42-43; and Davies (2007), pp. 684-85. Reno (1995, 2003) are the
best treatments of Stevens’s regime. The data on the agricultural
marketing boards comes from Davies (2007). On the murder of Sam
Bangura by defenestration, see Reno (1995), pp. 137-41. Jackson
(2004), p. 63, and Keen (2005), p. 17, discuss the acronyms ISU and
SSD.

Bates (1981) is the seminal analysis of how marketing boards
destroyed agricultural productivity in postindependence Africa, see
Goldstein and Udry (2009) on how political connections to chiefs
determine property rights to land in Ghana.

On the relation between politicians in 1993 and the conquistadors,
see Dosal (1995), chap. 1, and Casaus Arzu (2007). Our discussion of
the policies of the Consulado de Comercio follows Woodward (1966).
The quote from President Barrios is from McCreery (1994), pp. 187-
88. Our discussion of the regime of Jorge Ubico follows Grieb (1979).

Our discussion of the underdevelopment of the U.S. South follows
Acemoglu and Robinson (2008b). See Wright (1978) on the pre-Civil
War development of the slave economy, and Bateman and Weiss
(1981) on the dearth of industry. Fogel and Engerman (1974) give a
different and controversial interpretation. Wright (1986) and Ransom
and Sutch (2001) give overviews of the extent to which the southern

economy after 1865 really changed. Congressman George Washington
Julian is quoted in Wiener (1978), p. 6. The same book contains the
analysis of the persistence of the southern landed elite after the Civil
War. Naidu (2009) examines the impact of the introduction of poll
taxes and literacy tests in the 1890s in southern states. The quotation
from W.E.B. Du Bois is in his book Du Bois (1903), p. 88. Clause 256
of the Alabama constitution can be found at
www. legislature . state . al.us/CodeOfAlabama/Constitution/
1901/CA-245806.htm.

Alston and Ferrie (1999) discuss how southern politicians blocked
federal legislation they thought would disrupt the South’s economy.
Woodward (1955) gives a seminal overview of the creation of Jim
Crow.

Overviews of the Ethiopian revolution are provided in Halliday and
Molyneux (1981). On the Emperor’s cushions, see Kapuscinski (1983).
The quotes from Dawit Wolde Giorgis are from Dawit Wolde Giorgis
(1989), pp. 49 and 48, respectively.

Chapter 13 : Why Nations Fail Today

For the BBC report on Mugabe’s lottery success, including the
public statement of Zimbank, see

news.bbc.co.uk/2/hi/africa/621895.stm.

Our treatment of the creation of white rule in Rhodesia follows
Palmer (1977) and Alexander (2006). Meredith (2007) provides a
good overview of more recent Zimbabwean politics.

Our account of the civil war in Sierra Leone follows Richards
(1996), Truth and Reconciliation Commission (2004), and Keen
(2005). The analysis published in a newspaper in the capital city of
Freetown in 1995 is quoted from Keen (2005), p. 34. The text of the
RUF’s “Footpaths to Democracy” can we found at www.sierra-
leone.org/AFRC-RUF/footpaths.html.

The quotation from the teenager from Geoma is from Keen (2005),
p. 42.

Our discussion of the Colombian paramilitaries follows Acemoglu,
Robinson, and Santos (2010) and Chaves and Robinson (2010), which
in turn heavily rely on the extensive work by Colombian scholars,
particularly Romero (2003), the essays in Romero (2007), and Lopez
(2010). Leon (2009) is an accessible and balanced account of the
nature of contemporary conflicts in Colombia. Also fundamental is
the Web site run by the weekly newspaper Semana,
www.verdadabierta.com/. All the quotes come from Acemoglu,
Robinson, and Santos (2010). The contract between Martin Llanos
and the mayors in Casanare is available in Spanish at
www. verdadabierta. com/victimarios/los-j efes/7 1 4-perfil-hector-
german-buitrago-alias-martin-llanos.

The origins and consequences of El Corralito are well presented in a
series of articles in The Economist magazine, available at
www.economist.com/search/apachesolr_search/corralito.

On the role of the interior in Argentine development, see Sawers
(1996).

Hassig and Oh (2009) provides an excellent, valuable account of

life in North Korea. Chap. 2 covers the luxurious lifestyle of the
leadership, and chaps. 3 and 4, the economic realities that most
people face. The BBC coverage of the currency reform can be found at
news.bbc.co.uk/2/hi/8500017.stm. On the pleasure palace and
brandy consumption, see chap. 12 of Post (2004).

Our discussion of child labor and its use for picking cotton in
Uzbeksitan follows Kandiyoti (2008), available at
www.soas.ac.uk/cccac/events/cotton-sector-in-central-asia-
2005/file49842.pdf. The quote from Gulnaz is on p. 20 of Kandiyoti.
On the Andijon uprising, see International Crisis Group (2005). The
description of the election of Joseph Stalin in the Soviet Union is
reproduced from Denny (1937).

Our analysis of “crony capitalism” in Egypt follows Sfakianakis
(2004).

Chapter 14 : Breaking the Mold

Our treatment of Botswana follows Acemoglu, Johnson, and
Robinson (2003); Robinson and Parsons (2006); and Leith (2005).
Schapera (1970) and Parsons, Henderson, and Tlou (1995) are
fundamental works. High Commissioner Rey is quoted in Acemoglu,
Johnson, and Robinson (2003), p. 96. The discussion of the three
chiefs’ visit to England follows Parsons (1998), and all quotes relating
to this come from his book: Chamberlain, pp. 206-7; Fairfield, p. 209;
and Rhodes, p. 223. Schapera is quoted from Schapera (1940), p. 72.
The quote from Quett Masire is from Masire (2006), p. 43. On the
ethnic composition of the Tswana tribes, see Schapera (1952).

Our treatment of change in the U.S. South follows Acemoglu and
Robinson (2008b). On the population movement out of the U.S.
South, see Wright (1999); on the mechanization of cotton picking,
Heinicke (1994). “FRDUM FOOF SPETGH” is quoted from Mickey
(2008), p. 50. Thurmond’s 1948 speech is taken from
www.slate.com/id/2075151/, where you also can listen to the audio
recording. On James Meredith and Oxford, Mississippi, see Doyle
(2001). See Wright (1999) on the impact of civil rights legislation on
black voting in the South.

On the nature and politics of China’s political transition after the
death of Mao, see Harding (1987) and MacFarquhar and Schoenhals
(2008). Deng’s quote about the cat is from Harding, p. 58. The first
point of the Cultural Revolution is from Schoenhals (1996), p. 33;
Mao on Hitler is from MacFarquhar and Schoenhals, p. 102; Hua on
the “Two Whatevers” is from Harding, p. 56.

Chapter 1 5 : Understanding Prosperity and Poverty

For the story of Dai Guofang, see McGregor (2010), pp. 219-26.
The story of red telephones is also from McGregor, chap. 1. On the
control of the party over media, see Pan (2008), chap. 9, and
McGregor (2010), pp. 64-69 and 235-62. The quotes on the party’s
attitudes toward entrepreneurs are from McGregor (2010), pp. 200-
201 and 223. For Wen Jiabao’s comments on political reforms in
China, see www.guardian.co.uk/world/2010/aug/29/wen-jiabao-
china-reform.

The modernization hypothesis is clearly articulated in Lipset
(1959). The evidence against it is discussed in detail in Acemoglu,
Johnson, Robinson, and Yared (2008, 2009). George H. W. Bush’s
quote is from news.bbc.co.uk/2/hi/business/752224.stm.

Our discussion of NGO activity and foreign aid in Afghanistan after
December 2001 draws on Ghani and Lockhart (2008). See also
Reinikka and Svensson (2004) and Easterly (2006) on problems of
foreign aid.

Our discussion of problems of macroeconomic reform and inflation
in Zimbabwe is from Acemoglu, Johnson, Robinson, and Querubin
(2008). The Seva Mandir discussion is drawn from Banerjee, Duflo,
and Glennerster (2008).

The formation of the Workers’ Party in Brazil is covered in Keck
(1992); on the Scania strike, see chap. 4. The quote from Cardoso is
from Keck, pp. 44-45; the quote from Lula is on Keck, p. 65.

The discussion of the efforts of Fujimori and Montesinos to control
the media is from McMillan and Zoido (2004), and the quote on the
Chinese Communist Party’s control is from McGregor (2010), p. 69.

Sources for the Maps

Map 1: The Inca Empire and road system are adapted from John V.
Murra (1984), “Andean Societies before 1532,” in Leslie Bethell, ed.,

The Cambridge History of Latin America, vol. 1 (New York: Cambridge
University Press). The map of the mita catchment area is taken from
Melissa Dell (2010), “The Persistent Effects of Peru’s Mining Mita,”
Econometrica 78:6, 1863-1903.

Map 2: Drawn using data from Miriam Bruhn and Francisco Gallego
(2010), “The Good, the Bad, and the Ugly: Do They Matter for
Economic Development?” forthcoming in the Review of Economics and
Statistics.

Map 3: Drawn using data from World Development Indicators
(2008), the World Bank.

Map 4: Map of wild pigs adapted from W. L. R. Oliver; I. L. Brisbin,
Jr.; and S. Takahashi (1993), “The Eurasian Wild Pig (Sus scrofa ),” in
W. L. R. Oliver, ed., Pigs, Peccaries, and Hippos: Status Survey and
Action Plan (Gland, Switzerland: IUCN), pp. 112-21. Wild cattle
adapted from map of aurochs from Cis van Vuure (2005), Retracing
the Aurochs (Sofia: Pensoft Publishers), p. 41.

Map 5: Adapted from Daniel Zohary and Maria Hopf (2001), The
Domestication of Plants in the Old World, 3rd edition (New York:
Oxford University Press), wheat map 4, p. 56; barley map 5, p. 55.
Map of rice distribution adapted from Te-Tzu Chang (1976), “The
Origin, Evolution, Cultivation, Dissemination, and Diversification of
Asian and African Rices,” Euphytica 25, 425-41, figure 2, p. 433.

Map 6: The Kuba Kingdom is based on Jan Vansina (1978), The
Children of Woot (Madison: University of Wisconsin Press), map 2, p.
8. Kongo based on Jan Vansina (1995), “Equatorial Africa Before the
Nineteenth Century,” in Philip Curtin, Steven Feierman, Leonard
Thompson, and Jan Vansina, African History: From Earliest Times to
Independence (New York: Longman), map 8.4, p. 228.

Map 7: Drawn using data from the Defense Meteorological Satellite
Program’s Operational Linescan System (DMSP-OLS), which reports
images of the Earth at night captured from 20:00 to 21:30 local time
from an altitude of 830 km

(http : //www. ngdc . noaa. go v/dmsp/sensors/ols . html) .

Map 8: Constructed from data in Jerome Blum (1998), The End of
the Old Order in Rural Europe (Princeton: Princeton University Press).

Map 9: Adapted from the maps in Colin Martin and Geoffrey Parker
(1988), The Spanish Armada (London: Hamilton), pp. i-ii, 243.

Map 10: Adapted from Simon Martin and Nikolai Gribe (2000),
Chronicle of the Maya Kings and Queens: Deciphering the Dynasties of the
Ancient Maya (London: Thames and Hudson), p. 21.

Map 1 1 : Map adapted from Mark A. Kishlansky, Patrick Geary, and
Patricia O’Brien (1991), Civilization in the West (New York:
HarperCollins Publishers), p. 151.

Map 12: Somali clan families adapted from loan M. Lewis (2002), A
Modem History of Somalia (Oxford: James Currey), map of “Somali
ethnic and clan-family distribution 2002”; map of Aksum adapted
from Kevin Shillington (1995), History of Africa, 2nd edition (New
York: St. Martin’s Press), map 5.4, p. 69.

Map 13: J. R. Walton (1998), “Changing Patterns of Trade and
Interaction Since 1500,” in R. A. Butlin and R. A. Dodgshon, eds., An
Historical Geography of Europe (Oxford: Oxford University Press),
figure 15.2, p. 326.

Map 14: Adapted from Anthony Reid (1988), Southeast Asia in the
Age of Commerce, 1450-1680: Volume 1, The Land Below the Winds
(New Haven: Yale University Press), map 2, p. 9.

Map 15: Drawn from data taken from Nathan Nunn (2008), “The
Long Term Effects of Africa’s Slave Trades,” Quarterly Journal of
Economics 123, no. 1, 139-76.

Map 16: Maps based on the following maps: for South Africa, A. J.
Christopher (2001), The Atlas of Changing South Africa (London:
Routledge), figure 1.19, p. 31; for Zimbabwe, Robin Palmer (1977),
Land and Racial Domination in Rhodesia (Berkeley: University of
California Press), map 5, p. 245.

Map 17: Adapted from Alexander Grab (2003), Napoleon and the
Transformation of Europe (London: Palgrave Macmillan), map 1, p. 17;
map 2, p. 91.

Map 18: Drawn using data from the 1840 U.S. Census,

downloadable at the National Historical Geographic Information
System: http://www.nhgis.org/.

Map 19: Drawn using data from the 1880 U.S. Census,

downloadable at the National Historical Geographic Information
System: http://www.nhgis.org/.

Map 20: Daron Acemoglu, James A. Robinson, and Rafael J. Santos
(2010), “The Monopoly of Violence: Evidence from Colombia,” at
http://scholar.harvard.edu/jrobinson/files/
j r_formationofstate . pdf.

REFERENCES

Abraham, Arthur, and Habib Sesay (1993). “Regional Politics and
Social Service Provision Since Independence.” In C. Magbaily Fyle,
ed. The State and the Provision of Social Services in Sierra Leone Since
Independence, 1961-1991. Oxford, U.K.: Codesaria.

Acemoglu, Daron (2005). “Politics and Economics in Weak and
Strong States.” Journal of Monetary Economics 52: 1199-226.

(2008). “Oligarchic Versus Democratic Societies.” Journal of

European Economic Association 6: 1-44.

Acemoglu, Daron, Davide Cantoni, Simon Johnson, and James A.
Robinson (2010). “From Ancien Regime to Capitalism: The Spread of
the French Revolution as a Natural Experiment.” In Jared Diamond
and James A. Robinson, eds. Natural Experiments in History.
Cambridge, Mass.: Harvard University Press.

(2011). “Consequences of Radical Reform: The French

Revolution.” American Economic Review, forthcoming.

Acemoglu, Daron, Simon Johnson, and James A. Robinson
(2001). “ The Colonial Origins of Comparative Development: An
Empirical Investigation.” American Economic Review 91: 1369-1401.

(2002). “Reversal of Fortune: Geography and Institutions in the

Making of the Modern World Income Distribution.” Quarterly Journal

of Economics 118: 1231-94.

(2003). “An African Success Story: Botswana.” In Dani Rodrik,

ed. In Search of Prosperity: Analytic Narratives on Economic Growth.
Princeton, N.J.: Princeton University Press.

(2005a). “Rise of Europe: Atlantic Trade, Institutional Change

and Economic Growth.” American Economic Review 95: 546-79.

(2005b). “Institutions as the Fundamental Cause of Long-Run

Growth.” In Philippe Aghion and Steven Durlauf, eds. Handbook of
Economic Growth. Amsterdam: North-Holland.

Acemoglu, Daron, Simon Johnson, James A. Robinson, and Pablo
Querubin (2008). “When Does Policy Reform Work? The Case of
Central Bank Independence.” Brookings Papers in Economic Activity,
351-418.

Acemoglu, Daron, Simon Johnson, James A. Robinson, and
Pierre Yared (2008). “Income and Democracy.” American Economic
Review 98: 808-42.

(2009). “Reevaluating the Modernization Hypothesis.” Journal of

Monetary Economics 56: 1043-58.

Acemoglu, Daron, and James A. Robinson (2000a). “Why Did the
West Extend the Franchise? Growth, Inequality and Democracy in
Historical Perspective.” Quarterly Journal of Economics 115: 1167-99.

(2000b). “ Political Losers as Barriers to Economic Development.”

American Economic Review 90: 126-30.

(2001). “ A Theory of Political Transitions.” American Economic

Review 91: 938-63.

(2006a). Economic Origins of Dictatorship and Democracy. New

York: Cambridge University Press.

(2006b). “ Economic Backwardness in Political Perspective.”

American Political Science Review 100: 115-31.

(2008a). “Persistence of Power, Elites and Institutions.” American

Economic Review 98: 267-93.

(2008b). “The Persistence and Change of Institutions in the

Americas.” Southern Economic Journal 75: 282-99.

Acemoglu, Daron, James A. Robinson, and Rafael Santos (2010).

“The Monopoly of Violence: Evidence from Colombia.” Unpublished.

Acemoglu, Daron, and Alex Wolitzky (2010). “The Economics of
Labor Coercion.” Econometric, 79: 555-600.

Aghion, Philippe, and Peter Howitt (2009). The Economics of
Growth. Cambridge, Mass.: MIT Press.

Alexander, Jocelyn (2006). The Unsettled Land: State-making and the
Politics of Land in Zimbabwe, 1893-2003. Oxford, U.K.: James Currey.

Allen, Robert C. (2003). Farm to Factory: A Reinterpretation of the
Soviet Industrial Revolution. Princeton, N.J.: Princeton University Press.

(2009a). The British Industrial Revolution in Global Perspective.

New York: Cambridge University Press.

(2009b). “ How Prosperous Were the Romans? Evidence from

Diocletian’s Price Edict (301 AD).” In Alan Bowman and Andrew
Wilson, eds. Quantifying the Roman Economy: Methods and Problems.
Oxford, U.K.: Oxford University Press.

Alston, Lee J., and Joseph P. Ferrie (1999). Southern Paternalism
and the Rise of the American Welfare State: Economics , Politics, and
Institutions in the South. New York: Cambridge University Press.

Amsden, Alice H. (1992). Asia’s Next Giant, New York: Oxford
Universty Press.

Austen, Ralph A., and Daniel Headrick (1983). “The Role of
Technology in the African Past.” African Studies Review 26: 163-84.

Austin, Gareth (2005). Labour, Land and Capital in Ghana: From
Slavery to Free Labour in Asante, 1807-1956. Rochester, N.Y.:
University of Rochester Press.

Bakewell, Peter J. (1984). Miners of the Red Mountain: Indian Labor
in Potosi, 1545-1650. Albuquerque: University of New Mexico Press.

(2009). A History of Latin America to 1825. Hoboken, N.J.:

Wiley-Blackwell.

Banerjee, Abhijit V., and Esther Duflo (2011). Poor Economics: A
Radical Rethinking of the Way to Fight Global Poverty. New York: Public
Affairs.

Banerjee, Abhijit V., Esther Duflo, and Rachel Glennerster
(2008). “Putting a Band-Aid on a Corpse: Incentives for Nurses in the
Indian Public Health Care System.” Journal of the European Economic
Association 7: 487-500.

Banfield, Edward C. (1958). The Moral Basis of a Backward Society.
Glencoe, N.Y.: Free Press.

Bang, Peter (2008). The Roman Bazaar. New York: Cambridge
University Press.

Barker, Graeme (2006). The Agricultural Revolution in Prehistory: Why
Did Foragers Become Farmers? New York: Oxford University Press.

Bar-Yosef, Ofer, and Avner Belfer-Cohen (1992). “From Foraging
to Farming in the Mediterranean Levant.” In A. B. Gebauer and T. D.
Price, eds. Transitions to Agriculture in Prehistory. Madison, Wise.:
Prehistory Press.

Bateman, Fred, and Thomas Weiss (1981). A Deplorable Scarcity:
The Failure of Industrialization in the Slave Economy. Chapel Hill:
University of North Carolina Press.

Bates, Robert H. (1981). Markets and States in Tropical Africa.
Berkeley: University of California Press.

(1983). Essays in the Political Economy of Rural Africa. New York:

Cambridge University Press.

(1989). Beyond the Miracle of the Market. New York: Cambridge

University Press.

(2001). Prosperity and Violence: The Political Economy of

Development. New York: W.W. Norton.

Benedictow, Ole J. (2004). The Black Death , 1346-1353: The
Complete History. Rochester, N.Y.: Boy dell Press.

Berliner, Joseph S. (1976). The Innovation Decision in Soviet Industry.
Cambridge, Mass.: Harvard University Press.

Besley, Timothy, and Stephen Coate (1998). “Sources of
Inefficiency in a Representative Democracy: A Dynamic Analysis.”
American Economic Review 88: 139-56.

Besley, Timothy, and Torsten Persson (2011). Pillars of Prosperity:
The Political Economics of Development Clusters. Princeton, N.J.:
Princeton University Press.

Bloch, Marc L. B. (1961). Feudal Society. 2 vols. Chiacgo: University
of Chicago Press.

Blum, Jerome (1943). “Transportation and Industry in Austria,
1815-1848.” The Journal of Modem History 15: 24-38.

Bogart, Dan, and Gary Richardson (2009). “Making Property
Productive: Reorganizing Rights to Real and Equitable Estates in
Britain, 1660 to 1830.” European Review of Economic History 13: 3-30.

(2011). “Did the Glorious Revolution Contribute to the Transport

Revolution? Evidence from Investment in Roads and Rivers.”
Economic History Review. Forthcoming.

Bourguignon, Francois, and Thierry Verdier (1990). “Oligarchy,
Democracy, Inequality and Growth.” Journal of Development Economics
62: 285-313.

Brenner, Robert (1976). “Agrarian Class Structure and Economic
Development in Preindustrial Europe.” Past and Present 70: 30-75.

(1993). Merchants and Revolution. Princeton, N.J.: Princeton

University Press.

Brenner, Robert, and Christopher Isett (2002). “England’s
Divergence from China’s Yangzi Delta: Property Relations,
Microeconomics, and Patterns of Development.” Journal of Asian
Studies 61: 609-62.

Brewer, John (1988). The Sinews of Power: War , Money and the
English State, 1688-1773. Cambridge, Mass.: Harvard University Press.

Briggs, Asa (1959). Chartist Studies. London: Macmillan.

Brunton, D., and D. H. Pennignton (1954). Members of the Long
Parliament. London: George Allen and Unwin.

Bundy, Colin (1979). The Rise and Fall of the South African Peasantry.
Berkeley: University of California Press.

Burke, Edmund (1790/1969). Reflections of the Revolution in France.
Baltimore, Md.: Penguin Books.

Cartwright, John R. (1970). Politics in Sierra Leone 1947-67.
Toronto: University of Toronto Press.

Casaus Arzu, Marta (2007). Guatemala: Linaje y Racismo. 3rd ed.,
rev. y ampliada. Guatemala City: F&G Editores.

Chaves, Isaias, and James A. Robinson (2010). “Political
Consequences of Civil Wars.” Unpublished.

Cleary, A. S. Esmonde (1989). The Ending of Roman Britain. London:
B.T. Batsford Ltd.

Clower, Robert W., George H. Dalton, Mitchell Harwitz, and Alan
Walters (1966). Growth Without Development; an Economic Survey of
Liberia. Evanston: Northwestern University Press.

Coatsworth, John H. (1974). “Railroads, Landholding and Agrarian
Protest in the Early Porfiriato.” Hispanic American Historical Review
54: 48-71.

(1978). “Obstacles to Economic Growth in Nineteenth-Century

Mexico.” American Historical Review 83: 80-100.

(2008). “Inequality, Institutions and Economic Growth in Latin

America.” Journal of Latin American Studies 40: 545-69.

Cole, G.D.H., and A. W. Filson, eds. (1951). British Working Class
Movements: Select Documents 1789-1875. London: Macmillan.

Conning, Jonathan (2010). “On the Causes of Slavery or Serfdom
and the Roads to Agrarian Capitalism: Domar’s Hypothesis Revisited.”
Unpublished, Department of Economics, Hunter College, CUNY.

Corti, Egon Caeser (1928). The Reign of the House of Rothschild. New
York: Cosmopolitan Book Corporation.

Crouzet, Francois (1985). The First Industrialists: The Problem of
Origins. New York: Cambridge University Press.

Crummey, Donald E. (2000). Land and Society in the Christian
Kingdom of Ethiopia: From the Thirteenth to the Twentieth Century.
Urbana: University of Illinois Press.

Dalton, George H. (1965). “History, Politics and Economic
Development in Liberia.” Journal of Economic History 25: 569-91.

Dark, K. R. (1994). Civitas to Kingdom: British Political Continuity 300-
800. Leicester, U.K.: Leicester University Press.

Daunton, Martin J. (1995). Progress and Poverty: An Economic and
Social History of Britain, 1700-1850. Oxford, U.K.: Oxford University
Press.

Davies, Robert W. (1998). Soviet Economic Development from Lenin to
Khrushchev. New York: Cambridge University Press.

Davies, Robert W., and Stephen G. Wheatcroft (2004). The Years
of Hunger: Soviet Agriculture, 1931-33. New York: Palgrave Macmillan.

Davies, Victor A. B. (2007). “Sierra Leone’s Economic Growth
Performance, 1961-2000.” In Benno J. Ndulu et al., eds. The Political
Economy of Growth in Africa, 1960-2000. Vol. 2. New York:
Cambridge University Press.

Dawit Wolde Giorgis (1989). Red Teas: War, Famine and Revolution
in Ethiopia. Trenton, N.J.: Red Sea Press.

De Callatad, Francois (2005). “The Graeco-Roman Economy in the
Super Longrun: Lead, Copper, and Shipwrecks.” Journal of Roman
Archaeology 18: 361-72.

de las Casas, Bartolome (1992). A Short Account of the Destruction of
the Indies. New York: Penguin Books.

Dell, Melissa (2010). “The Persistent Effects of Peru’s Mining Mita.”
Econometrica 78: 1863-903.

Denny, Harold (1937). “Stalin Wins Poll by a Vote of 1005.” New
York Times, December 14, 1937, p. 11.

de Sahagun, Bernardino (1975). Florentine Codex: General History of
the Things of New Spain. Book 12: The Conquest of Mexico. Santa Fe,
N.M.: School of American Research.

Diamond, Jared (1997). Guns, Germs and Steel. New York: W.W.
Norton and Co.

Dobb, Maurice (1963). Studies in the Development of Capitalism. Rev.
ed. New York: International Publishers.

Dosal, Paul J. (1995). Power in Transition: The Rise of Guatemala’s
Industrial Oligarchy, 1871-1994. Westport, Conn.: Praeger.

Douglas, Mary (1962). “Lele Economy Compared to the Bushong.” In
Paul Bohannan and George Dalton, eds. Markets in Africa. Evanston,
111.: Northwestern University Press.

(1963). The Lele of the Kasai. London: Oxford University Press.

Doyle, William (2001). An American Insurrection: The Battle of Oxford
Mississippi. New York: Doubleday.

(2002). The Oxford History of the French Revolution. 2nd ed. New

York: Oxford University Press.

Dreyer, Edward L. (2007). Zheng He: China and the Oceans in the
Early Ming Dynasty, 1405-1433. New York: Pearson Longman.

Du Bois, W.E.B. (1903). The Souls of Black Folk. New York: A.C.
McClurg & Company.

Dunn, Richard S. (1969). “The Barbados Census of 1680: Profile of
the Richest Colony in English America.” William and Mary Quarterly

26: 3-30.

DuPlessis, Robert S. (1997). Transitions to Capitalism in Early Modem
Europe. New York: Cambridge University Press.

Easterly, William (2006). The White Man’s Burden: Why the West’s
Efforts to Aid the Rest Have Done So Much III and So Little Good. New
York: Oxford University Press.

Elton, Geoffrey R. (1953). The Tudor Revolution in Government. New
York: Cambridge University Press.

Engerman, Stanley L. (2007). Slavery , Emancipation & Freedom:
Comparative Perspectives. Baton Rouge: University of Lousiana Press.

Engerman, Stanley L., and Kenneth L. Sokoloff (1997). “Factor
Endowments, Institutions, and Differential Paths of Growth Among
New World Economies.” In Stephen H. Haber, ed. How Latin America
Fell Behind. Stanford, Calif.: Stanford University Press.

(2005). “The Evolution of Suffrage Institutions in the New

World.” Journal of Economic History 65: 891-921.

Evans, Eric J. (1996). The Forging of the Modern State: Early Industrial
Britain, 1783-1870. 2nd ed. New York: Longman.

Evans, Peter B. (1995). Embedded Autonomy: States and Industrial
Transformation. Princeton, N.J.: Princeton University Press.

Ewald, Janet (1988). “Speaking, Writing and Authority: Explorations
in and from the Kingdom of Taqali.” Comparative Studies in History
and Society 30: 199-224.

Fagan, Brian (2003). The Long Summer: How Climate Changed
Civilization. New York: Basic Books.

Faulkner, Neil (2000). The Decline and Fall of Roman Britain. Stroud,
U.K.: Tempus Publishers.

Feinstein, Charles H. (2005). An Economic History of South Africa:
Conquest, Discrimination and Development. New York: Cambridge
University Press.

Ferguson, Niall (1998). The House of Rothschild: Vol. 1: Money’s
Prophets, 1798-1848. New York: Viking.

Fergusson, Leopoldo (2010). “The Political Economy of Rural
Property Rights and the Persistance of the Dual Economy.”
Unpublished, http://economia.uniandes.edu.co.

Finley, Moses (1965). “Technical Innovation and Economic Progress
in the Ancient World.” Economic History Review 18: 29-4.

<1999). The Ancient Economy. Berkeley: University of California

Press.

Fischer, David H. (1989). Albion’s Seed: Four British Folkways in
America. New York: Oxford University Press.

Fogel, Robert W., and Stanley L. Engerman (1974). Time on the
Cross: The Economics of American Negro Slavery. Boston: Little, Brown.

Foley, James A. (2003). Korea’s Divided Families: Fifty Years of
Separation. New York: Routledge.

Freudenberger, Herman (1967). “The State as an Obstacle to
Economic Growth in the Hapsburg Monarchy.” Journal of Economic
History 27: 493-509.

Galenson, David W. (1996). “The Settlement and Growth of the
Colonies: Population, Labor and Economic Development.” In Stanley
L. Engerman and Robert E. Gallman, eds. The Cambridge Economic
History of the United States , Volume I: The Colonial Era. New York:
Cambridge University Press.

Ganson, Barbara (2003). The Guarani Under Spanish Rule in the Rio
de la Plata. Palo Alto, Calif.: Stanford University Press.

Garcfa-Jimeno, Camilo, and James A. Robinson (2011). “The
Myth of the Frontier.” In Dora L. Costa and Naomi R. Lamoreaux, eds.
Understanding Long-Run Economic Growth. Chicago: University of
Chicago Press.

Gerschenkron, Alexander (1970). Europe in the Russian Mirror. New
York: Cambridge University Press.

Ghani, Ashraf, and Clare Lockhart (2008). Fixing Failed States: A
Framework for Rebuilding a Fractured World. New York: Oxford
University Press.

Gibson, Charles (1963). The Aztecs Under Spanish Rule. New York:
Cambridge University Press.

Goldstein, Marcus, and Christopher Udry (2008). “The Profits of
Power: Land Rights and Agricultural Investment in Ghana.” Journal of
Political Economy 116: 981-1022.

Goldsworthy, Adrian K. (2009). How Rome Fell: Death of a
Superpower. New Haven, Conn.: Yale University Press.

Goody, Jack (1971). Technology , Tradition and the State in Africa.
New York: Cambridge University Press.

Gregory, Paul R., and Mark Harrison (2005). “Allocation Under
Dictatorship: Research in Stalin’s Archives.” Journal of Economic
Literature 43: 721-61.

Grieb, Kenneth J. (1979). Guatemalan Caudillo: The Regime of Jorge
Ubico, 1931-1944. Athens: Ohio University Press.

Gross, Nachum T. (1973). “The Habsburg Monarchy, 1750-1914.”
In Carlo M. Cipolla, ed. The Fontana Economic History of Europe.
Glasgow, U.K.: William Collins Sons and Co.

Guiso, Luigi, Paola Sapienza, and Luigi Zingales (2006). “Does
Culture Affect Economic Outcomes?” Journal of Economic Perspectives
20: 23-48.

Haber, Stephen H. (2010). “Politics, Banking, and Economic
Development: Evidence from New World Economies.” In Jared

Diamond and James A. Robinson, eds. Natural Experiments of History.
Cambridge, Mass.: Belknap Press of Harvard University Press.

Haber, Stephen H., Herbert S. Klein, Noel Maurer, and Kevin J.
Middlebrook (2008). Mexico Since 1980. New York: Cambridge
University Press.

Haber, Stephen H., Noel Maurer, and Armando Razo (2003). The

Politics of Property Rights: Political Instability , Credible Commitments,
and Economic Growth in Mexico, 1876-1929. New York: Cambridge
University Press.

Haggard, Stephan (1990). Pathways from the Periphery: The Politics of
Growth in the Newly Industrializing Countries. Ithaca, N.Y.: Cornell
University Press.

Halliday, Fred, and Maxine Molyneux (1981). The Ethiopian
Revolution. London: Verso.

Hanna, Willard (1978). Indonesian Banda: Colonialism and Its
Aftermath in the Nutmeg Islands. Philadelphia: Institute for the Study of
Human Issues.

Harding, Harry (1987). China’s Second Revolution: Reform After Mao.
Washington, D.C.: Brookings Institution Press.

Harrison, Lawrence E., and Samuel P. Huntington, eds. (2000).

Culture Matters: How Values Shape Human Progress. New York: Basic
Books.

Hassig, Ralph C., and Kongdan Oh (2009). The Hidden People of
North Korea: Everyday Life in the Hermit Kingdom. Lanham, Md.:
Rowman and Littlefield Publishers.

Hatcher, John (2008). The Black Death: A Personal History.
Philadelphia: Da Capo Press.

Heath, Dwight (1972). “New Patrons for Old: Changing Patron-
Client Relations in the Bolivian Yungas.” In Arnold Strickton and
Sidney Greenfield, eds. Structure and Process in Latin America.
Albuquerque: University of New Mexico Press.

Heinicke, Craig (1994). “African-American Migration and
Mechanized Cotton Harvesting, 1950-1960.” Explorations in Economic
History 31: 501-20.

Helmke, Gretchen (2004). Courts Under Constraints: Judges , Generals ,
and Presidents in Argentina. New York: Cambridge University Press.

Hemming, John (1983). The Conquest of the Incas. New York:
Penguin Books.

Herbst, Jeffrey I. (2000). States and Power in Africa. Princeton, N.J.:
Princeton University Press.

Hill, Christopher (1961). The Century of Revolution, 1603-1714. New
York: W. W. Norton and Co.

(1980). “ A Bourgeois Revolution?” In Lawrence Stone, ed. The

British Revolutions: 1641, 1688, 1776. Princeton, N.J.: Princeton

University Press.

Hilton, Anne (1985). The Kingdom of Kongo. New York: Oxford
University Press.

Hilton, Rodney (2003). Bond Men Made Free: Medieval Peasant
Movements and the English Rising of 1381. 2nd ed. New York:
Routledge.

Hirst, John B. (1983). Convict Society and Its Enemies: A History of
Early New South Wales. Boston: Allen and Unwin.

(1988). The Strange Birth of Colonial Democracy: New South Wales,

1848-1884. Boston: Allen and Unwin.

(2003). Australia’s Democracy: A Short History. London: Allen and

Unwin.

Hopkins, Anthony G. (1973). An Economic History of West Africa.
New York: Addison Wesley Longman.

Hopkins, Keith (1980). “Taxes and Trade in the Roman Empire, 200
bc-400 ad.” Journal of Roman Studies LXX: 101-25.

Horrox, Rosemary, ed. (1994). The Black Death. New York: St.
Martin’s Press.

House of Commons (1904). “Papers Relating to the Construction of
Railways in Sierra Leone, Lagos and the Gold Coast.”

Hu-DeHart, Evelyn (1984). Yaqui Resistance and Survival: The
Struggle for Land and Autonomy, 1821-1910. Madison: University of
Wisconsin Press.

Iaryczower, Matfas, Pablo Spiller, and Mariano Tommasi (2002).

“Judicial Independence in Unstable Environments: Argentina 1935-
1998.” American Journal of Political Science 46: 699-716.

Inikori, Joseph (1977). “The Import of Firearms into West Africa,
1751-1807.” Journal of African History 18: 339-68.

International Crisis Group (2005). “Uzbekistan: The Andijon
Uprising,” Asia Briefing No. 38,

www.crisisgroup.org/en/regions/asia/central-asia/uzbekistan/B038-
uzbekistan-the-andij on-uprising, aspx.

Israel, Paul (2000). Edison : A Life of Invention. Hoboken, N.J.: John
Wiley and Sons.

Iwata, Masakazu (1964). Okubo Toshimichi: The Bismarck of Japan.
Berkeley: University of California Press.

Jackson, Michael (2004). In Sierra Leone. Durham, N.C.: Duke
University Press.

Jansen, Marius B. (2000). The Making of Modem Japan. Cambridge,
Mass.: Harvard University Press.

Jaszi, Oscar (1929). The Dissolution of the Habsburg Monarchy.
Chicago: University of Chicago Press.

Johnson, Chalmers A. (1982). MITI and the Japanese Miracle: The
Growth of Industrial Policy, 1925-1975. Palo Alto, Calif.: Stanford
University Press.

Jones, A.M.H. (1964). The Later Roman Empire. Volume 2. Oxford,
U.K.: Basil Blackwell.

Jones, Eric L. (2003). The European Miracle: Environments, Economies
and Geopolitics in the History of Europe and Asia. 3rd ed. New York:
Cambridge University Press.

Jongman, Willem M. (2007). “Gibbon Was Right: The Decline and
Fall of the Roman Economy.” In O. Hekster et al., eds. Crises and the
Roman Empire. Leiden, the Netherlands: BRILL.

Josephson, Matthew (1934). The Robber Barons. Orlando, Fla.:
Harcourt.

Kandiyoti, Deniz (2008). “Invisible to the World? The Dynamics of
Forced Child Labour in the Cotton Sector of Uzbekistan.”
Unpublished. School of Oriental and Africa Studies.

Kapuscinski, Ryszard (1983). The Emperor: Downfall of an Autocrat.
San Diego: Harcourt Brace Jovanovich.

Keck, Margaret E. (1992). The Workers’ Party and Democratization in
Brazil. New Haven, Conn.: Yale University Press.

Keen, David (2005). Conflict and Collusion in Sierra Leone. New York:
Palgrave Macmillan.

Kelley, Jonathan, and Herbert S. Klein (1980). Revolution and the
Rebirth of Inequality: A Theory of Inequality and Inherited Privilege
Applied to the Bolivian National Revolution. Berkeley: University of
California Press.

Keyssar, Alexander (2009). The Right to Vote: The Contested History
of Democracy in the United States. Revised Edition. New York: Basic
Books.

Killick, Tony (1978). Development Economics in Action. London:
Heinemann.

Knight, Alan (2011). Mexico: The Nineteenth and Twentieth Centuries.
New York: Cambridge University Press.

Knights, Mark (2010). “Participation and Representation Before
Democracy: Petitions and Addresses in Premodern Britain.” In Ian
Shapiro, Susan C. Stokes, Elisabeth Jean Wood, and Alexander S.
Kirshner, eds. Political Representation. New York: Cambridge
University Press.

Kropotkin, Peter (2009). Memoirs of a Revolutionary. New York:
Cosimo.

Kupperman, Karen O. (2007). The Jamestown Project. Cambridge,
Mass.: Belknap Press of Harvard University Press.

Landes, David S. (1999). The Wealth and Poverty of Nations: Why
Some Are So Rich and Some So Poor. New York: W. W. Norton and Co.

Lane, Frederick C. (1973). Venice: A Maritime Republic. Baltimore,
Md.: Johns Hopkins University Press.

La Porta, Rafael, Florencio Lopez-de-Silanes, and Andrei Shleifer
(2008). “The Economic Consequences of Legal Origins.” Journal of
Economic Literature 46: 285-332.

Law, Robin C. (1977). The Empire , C.1600-C.1836: West African
Imperialism in the Era of the Atlantic Slave Trade. Oxford, UK: The
Clarendon Press.

(1980). “Wheeled Transportation in Pre-Colonial West Africa.”

Africa 50: 249-62.

, ed. (1995). From Slave Trade to “ Legitimate ” Commerce: The

Commercial Transition in Nineteenth-century West Africa. New York:
Cambridge University Press.

Leith, Clark J. (2005). Why Botswana Prospered. Montreal: McGill
University Press.

Lenger, Friedrich (2004). “Economy and Society.” In Jonathan
Sperber, ed. The Shorter Oxford History of Germany: Germany 1800-
1870. New York: Oxford University Press.

Leon, Juanita (2009). Country of Bullets: Chronicles of War.
Albuquerque: University of New Mexico Press.

Lerner, Abba P. (1972). “The Economics and Politics of Consumer
Sovereignty.” American Economic Review 62: 258-66.

Levy, David M., and Sandra J. Peart (2009). “Soviet Growth and
American Textbooks.” Unpublished.

Lewis, I. M. (1961). A Pastoral Democracy. Oxford, U.K.: Oxford
University Press.

(2002). A Modem History of the Somali. 4th ed. Oxford, U.K.:

James Currey.

Lewis, W. Arthur (1954). “Economic Development with Unlimited
Supplies of Labour.” Manchester School of Economic and Social Studies
22: 139-91.

Lindert, Peter H. (2004). Growing Public. Volume 1: Social Spending
and Economic Growth Since the Eighteenth Century. New York:
Cambridge University Press.

(2009). Growing Public. Volume 2: Further Evidence: Social

Spending and Economic Growth Since the Eighteenth Century. New York:
Cambridge University Press.

Lipset, Seymour Martin (1959). “Some Social Requisites of
Democracy: Economic Development and Political Legitimacy.”
American Political Science Review 53: 69-105.

Lipset, Seymour Martin, and Stein Rokkan, eds. (1967). Party
System and Voter Alignments. New York: Free Press.

Lopez, Claudia, ed. (2010). Y Rejundaron la Patria ... de como
mafiosos y politicos reconfiguraron el Estado Colombiano. Bogota:

Corporacion Nuevo Arco Iris: Intermedio.

Lovejoy, Paul E. (2000). Transformations in Slavery: A History of
Slavery in Africa. 2nd ed. New York: Cambridge University Press.

MacFarquhar, Roderick, and Michael Schoenhals (2008). Mao’s
Last Revolution. Cambridge, Mass.: Harvard University Press.

Mann, Michael (1986). The Sources of Social Power. Volume 1: A
History of Power from the Beginning to A.D. 1760. New York:
Cambridge University Press.

(1993). The Sources of Social Power. Volume 2: The Rise of Classes

and Nation-states, 1760-1914. New York: Cambridge University Press.

Manning, Patrick (1990). Slavery and African Life: Occidental,
Oriental, and African Slave Trades. New York: Cambridge University
Press.

Mantoux, Paul (1961). The Industrial Revolution in the Eighteenth
Century. Rev. ed. New York: Harper and Row.

Martin, Simon, and Nikolai Grube (2000). Chronicle of the Maya
Kings and Queens: Deciphering the Dynasties of the Ancient Maya. New
York: Thames and Hudson.

Martinez, Jose (2002). Carlos Slim: Retrato Inedito. Mexico City:
Editorial Oceano.

Masire, Quett K. J. (2006). Very Brave or Very Foolish? Memoirs of an
African Democrat. Gaborone, Botswana: Macmillan.

McCreery, David J. (1994). Rural Guatemala , 1760-1940. Palo Alto,
Calif.: Stanford University Press.

McGregor, Richard (2010). The Party: The Secret World of China’s
Communist Rulers. New York: Harper.

McMillan, John, and Pablo Zoido (2004). “How to Subvert
Democracy: Montesinos in Peru.” Journal of Economic Perspectives 18:
69-92.

Melbourne, Alexander C. V. (1963). Early Constitutional Development
in Australia: New South Wales 1788-1856 ; Queensland 1859-1922.
With notes to 1963 by the editor. Edited and introduced by R. B.
Joyce. 2nd ed. St. Lucia: University of Queensland Press.

Meredith, Martin (2007). Mugabe: Power, Plunder, and the Struggle for
Zimbabwe’s Future. New York: Public Affairs Press.

Michels, Robert (1962). Political Parties: A Sociological Study of the
Oligarchical Tendencies of Modem Democracy. New York: Free Press.

Mickey, Robert W. (2008). Paths out of Dixie: The Democratization of
Authoritarian Enclaves in America’s Deep South, 1944-1972.
Unpublished book manuscript.

Migdal, Joel S. (1988). Strong Societies and Weak States: State-Society
Relations and State Capabilities in the Third World. Princeton, N.J.:

Princeton University Press.

Mithen, Stephen (2006). After the Ice: A Global Human History
20,000-5000 BC. Cambridge, Mass.: Harvard University Press.

Mokyr, Joel (1990). The Lever of Riches: Technological Creativity and
Economic Progress. New York: Oxford University Press.

(2009). The Enlightened Economy. New York: Penguin.

Moore, Andrew M. T., G. C. Hillman, and A. J. Legge (2000).

Village on the Euphrates: From Foraging to Farming at Abu Hureyra. New
York: Oxford University Press.

Morgan, Edmund S. (1975). American Slavery, American Freedom:
The Ordeal of Colonial Virginia. New York: W. W. Norton and Co.

Munro-Hay, Stuart C. (1991). Aksum: An African Civilisation of Late
Antiquity. Edinburgh: Edinburgh University Press.

Myers, Ramon H., and Yeh-Chien Wang (2002). “Economic
Developments, 1644-1800.” In Willard J. Peterson, ed. The Cambridge
History of China. Volume 9, Part 1: The Ch’ing Empire to 1800. New
York: Cambridge University Press.

Naidu, Suresh (2009). “Suffrage, Schooling, and Sorting in the Post-
Bellum South.” Unpublished. Department of Economics, Columbia
University. Available at tuvalu.santafe.edu/~snaidu/papers/suffrage_
sept_l 6_201 0_combined.pdf.

Narayan, Deepa, ed. (2002). Empowerment and Poverty Reduction: A
Sourcebook. Washington, D.C.: The World Bank.

Neal, David (1991). The Rule of Law in a Penal Colony. New York:
Cambridge University Press.

Neale, J. E. (1971). Elizabeth I and Her Parliaments , 1559-1581.
London: Cape.

Nogal, C. Alvarez, and Leandro Prados de la Escosura (2007).

“The Decline of Spain (1500-1850): Conjectural Estimates.” European
Review of Economic History 11: 319-66.

North, Douglass C. (1982). Structure and Change in Economic History.
New York: W. W. Norton and Co.

North, Douglass C., and Robert P. Thomas (1973). The Rise of the
Western World: A New Economic History. New York: Cambridge
University Press.

North, Douglass C., John J. Wallis, and Barry R. Weingast
(1989). Violence and Social Orders: A Conceptual Framework for
Interpreting Recorded Human History. Princeton, N.J.: Princeton
University Press.

North, Douglass C., and Barry R. Weingast (1989). “Constitutions
and Commitment: Evolution of Institutions Governing Public Choice
in 17th Century England.” Journal of Economic History 49: 803-32.

Nove, Alec (1992). An Economic History of the USSR 1917-1991. 3rd

ed. New York: Penguin Books.

Nugent, Jeffrey B., and James A. Robinson (2010). “Are
Endowments Fate? On the Political Economy of Comparative
Institutional Development.” Revista de Historia Economica ( Journal of
Iberian and Latin American Economic History ) 28: 45-82.

Nunn, Nathan (2008). “The Long-Term Effects of Africa’s Slave
Trades.” Quarterly Journal of Economics 123: 139-76.

Nunn, Nathan, and Leonard Wantchekon (2011). “The Slave Trade
and the Origins of Mistrust in Africa,” forthcoming in the American
Economic Review.

O’Brien, Patrick K., Trevor Griffiths, and Philip Hunt (1991).

“Political Components of the Industrial Revolution: Parliament and
the English Cotton Textile Industry, 1660-1774.” Economic History
Review, New Series 44: 395-423.

Ogilvie, Sheilagh (2011). Institutions and European Trade: Merchant
Guilds 1000-1500. New York: Cambridge University Press.

Olson, Mancur C. (1984). The Rise and Decline of Nations: Economic
Growth, Stagflation, and Social Rigidities. New Haven, Conn.: Yale
University Press.

O’Rourke, Kevin H., and Jeffrey G. Williamson (2002). “After
Columbus: Explaining the Global Trade Boom 1500-1800.” Journal of
Economic History 62: 417-56.

Owen, E. Roger (1981). The Middle East in the World Economy , 1800-
1 91 4. London: Methuen and Co.

Owen, E. Roger, and §evket Pamuk (1999). A History of Middle East
Economies in the Twentieth Century. Cambridge, Mass.: Harvard
University Press.

Owen, Thomas C. (1991). The Corporation Under Russian Law, 1800-
1917. New York: Cambridge University Press.

Palmer, Robin H. (1977). Land and Racial Domination in Rhodesia.
Berkeley: University of California Press.

Palmer, Robin H., and Q. Neil Parsons, eds. (1977). The Roots of
Rural Poverty in Central and Southern Africa. London: Heinemann
Educational.

Pamuk, §evket (2006). “Estimating Economic Growth in the Middle
East Since 1820.” Journal of Economic History 66: 809-28.

Pan, Philip P. (2008). Out Of Mao’s Shadow: The Struggle for the Soul
of a New China. New York: Simon & Schuster.

Pankhurst, Richard (1961). An Introduction to the Economic History
of Ethiopia, from Early Times to 1800. London: Lalibela House.

Parsons, Q. Neil (1998). King Khama, Emperor Joe and the Great
White Queen. Chicago: University of Chicago Press.

Parsons, Q. Neil, Willie Henderson, and Thomas Tlou (1995).

Seretse Khama, 1921-1980. Bloemfontein, South Africa: Macmillan.

Perkins, Dwight H., Steven Radelet, and David L. Lindauer
(2006). Development Economics. 6th ed. New York: W. W. Norton and
Co.

Pettigrew, William (2007). “Free to Enslave: Politics and the
Escalation of Britain’s Transatlantic Slave Trade, 1688-1714.” William
and Mary Quarterly, 3rd ser., LXIV: 3-37.

(2009). “ Some Underappreciated Connections Between

Constitutional Change and National Economic Growth in England,
1660-1720.” Unpublished paper. Department of History, University
of Kent, Canterbury.

Phillipson, David W. (1998). Ancient Ethiopia: Aksum, Its Antecedents
and Successors. London: British Museum Press.

Pincus, Steven C. A. (2009). 1688: The First Modem Revolution. New
Haven, Conn.: Yale University Press.

Pincus, Steven C. A., and James A. Robinson (2010). “What Really
Happened During the Glorious Revolution?” Unpublished, http://
scholar, harvard, edu/j robinson.

Pintner, Walter M. (1967). Russian Economic Policy Under Nicholas I.
Ithaca, N.Y.: Cornell University Press.

Post, Jerrold M. (2004). Leaders and Their Followers in a Dangerous

World: The Psychology of Political Behavior. Ithaca, N.Y.: Cornell
University Press.

Price, David A. (2003). Love and Hate in Jamestown: John Smith ,
Pocahontas, and the Heart of a New Nation. New York: Knopf.

Puga, Diego, and Daniel Trefler (2010). “International Trade and
Domestic Institutions: The Medieval Response to Globalization.”
Unpublished. Department of Economics, University of Toronto.

Putnam, Robert H., Robert Leonardi, and Raffaella Y. Nanetti
(1994). Making Democracy Work: Civic Traditions in Modem Italy.
Princeton, N.J.: Princeton University Press.

Ransom, Roger L., and Richard Sutch (2001). One Kind of Freedom:
The Economic Consequences of Emancipation. 2nd ed. New York:
Cambridge University Press.

Reid, Anthony (1993). Southeast Asia in the Age of Commerce, 1450-
1680. Volume 2: Expansion and Crisis. New Haven, Conn.: Yale
University Press.

Reinikka, Ritva, and Jacob Svensson (2004). “Local Capture:
Evidence from a Central Government Transfer Program in Uganda.”
Quarterly Journal of Economics, 119: 679-705.

Relea, Francesco (2007). “Carlos Slim, Liderazgo sin Competencia.”
In Jorge Zepeda Patterson, ed. Los amos de Mexico: los juegos de poder
a los que solo unos pocos son invitados. Mexico City: Planeta Mexicana.

Reno, William (1995). Corruption and State Politics in Sierra Leone.
New York: Cambridge University Press.

(2003). “Political Networks in a Failing State: The Roots and

Future of Violent Conflict in Sierra Leone,” IPG 2: 44-66.

Richards, Paul (1996). Fighting for the Rainforest: War % Youth and
Resources in Sierra Leone. Oxford, U.K.: James Currey.

Robbins, Lionel (1935). An Essay on the Nature and Significance of
Economic Science. 2nd ed. London: Macmillan.

Robinson, Eric (1964). “Matthew Boulton and the Art of
Parliamentary Lobbying.” The Historical Journal 7: 209-29.

Robinson, James A. (1998). “Theories of Bad Policy.” Journal of
Policy Reform 1, 1-46.

Robinson, James A, and Q. Neil Parsons (2006). “State Formation
and Governance in Botswana.” Journal of African Economies 15, AERC
Supplement (2006): 100-140.

Rock, David (1992). Argentina 1516-1982: From Spanish Colonization
to the Falklands War. Berkeley: University of California Press.

Romero, Mauricio (2003). Paramilitares y autodefensas , 1982-2003.
Bogota: Editorial Planeta Colombiana.

, ed. (2007). Para Politico: La Ruta de la Expansion Paramilitar y

los Acuerdos Politicos, Bogota: Corporacion Nuevo Arco Iris:
Intermedio.

Sachs, Jeffery B. (2006). The End of Poverty: Economic Possibilities for
Our Time. New York: Penguin.

Sahlins, Marshall (1972). Stone Age Economics. Chicago: Aldine.

Saunders, David (1992). Russia in the Age of Reaction and Reform ,
1801-1881. New York: Longman.

Savage-Smith, Emily (2003). “Islam.” In Roy Porter, ed. The
Cambridge History of Science. Volume 4: Eighteenth-Century Science.
New York: Cambridge University Press.

Sawers, Larry (1996). The Other Argentina: The Interior and National
Development. Boulder: Westview Press.

Schapera, Isaac (1940). “The Political Organization of the Ngwato of
Bechuanaland Protectorate.” In E. E. Evans-Pritchard and Meyer
Fortes, eds. African Political Systems. Oxford, U.K.: Oxford University
Press.

(1952). The Ethnic Composition of the Tswana Tribes. London:

London School of Economics and Political Science.

(1970). Tribal Innovators: Tswana Chiefs and Social Change 1 795-

1 940. London: The Athlone Press.

Schoenhals, Michael, ed. (1996). China’s Cultural Revolution, 1966-
1969. Armonk, N.Y.: M.E. Sharpe.

Sfakianakis, John (2004). “The Whales of the Nile: Networks,
Businessmen and Bureaucrats During the Era of Privatization in
Egypt.” In Steven Heydemann, ed. Networks of Privilege in the Middle
East. New York: Palgrave Macmillan.

Sharp, Kevin (1992). The Personal Rule of Charles I. New Haven,
Conn.: Yale University Press.

Sheridan, Richard B. (1973). Sugar and Slaves: An Economic History
of the British West Indies 1623-1775. Baltimore, Md.: Johns Hopkins
University Press.

Sidrys, Raymond, and Rainer Berger (1979). “Lowland Maya
Radiocarbon Dates and the Classic Maya Collapse.” Nature 277: 269-
77.

Smith, Bruce D. (1998). Emergence of Agriculture. New York:
Scientific American Library.

Sokoloff, Kenneth L. (1988). “Inventive Activity in Early Industrial
America: Evidence from Patent Records, 1790-1846.” Journal of
Economic History 48: 813-30.

Sokoloff, Kenneth L., and B. Zorina Khan (1990). “The
Democratization of Invention During Early Industrialization: Evidence
from the United States, 1790-1846.” Journal of Economic History 50:
363-78.

Steffens, Lincoln (1931). The Autobiography of Lincoln Steffens. New
York: Harcourt, Brace and Company.

Stevens, Donald F. (1991). Origins of Instability in Early Republican
Mexico. Durham, N.C.: Duke University Press.

Stone, Lawrence (2001). The Causes of the English Revolution, 1529-
1642. New York: Routledge.

Tabellini, Guido (2010). “ Culture and Institutions: Economic
Development in the Regions of Europe.” Journal of the European
Economic Association 8, 677-716.

Tarbell, Ida M. (1904). The History of the Standard Oil Company. New
York: McClure, Phillips.

Tawney, R. H. (1941). “The Rise of the Gentry.” Economic History
Review 11: 1-38.

Temin, Peter, and Hans-Joachim Voth (2008). “Private Borrowing
During the Financial Revolution: Hoare’s Bank and Its Customers,
1702-24.” Economic History Review 61: 541-64.

Thompson, E. P. (1975). Whigs and Hunters: The Origin of the Black
Act. New York: Pantheon Books.

Thompson, I.A.A. (1994a). “Castile: Polity, Fiscality and Fiscal
Crisis.” In Philip T. Hoffman and Kathryn Norberg, eds. Fiscal Crisis,
Liberty, and Representative Government 1450-1789. Palo Alto, Calif.:
Stanford University Press.

(1994b). “Castile: Absolutism, Constitutionalism and Liberty.” In

Philip T.

Hoffman and Kathryn Norberg, eds. Fiscal Crisis , Liberty , and
Representative Government 1450-1789. Palo Alto, Calif.: Stanford
University Press.

Thornton, John (1983). The Kingdom of Kongo: Civil War and
Transition , 1641-1718. Madison: University of Wisconsin Press.

Todkill, Anas (1885). My Lady Pocahontas: A True Relation of
Virginia. Writ by Anas Todkill, Puritan and Pilgrim. Boston: Houghton,
Mifflin and Company.

Truth and Reconciliation Commission (2004). Final Report of the
Truth and Reconciliation Commission of Sierra Leone. Freetown.

Vansina, Jan (1978). The Children of Woot: A History of the Kuba
People. Madison: University of Wisconsin Press.

Wade, Robert H. (1990). Governing the Market: Economic Theory and
the Role of Government in East Asian Industrialization. Princeton, N.J.:
Princeton University Press.

Wallerstein, Immanuel (1974-2011). The Modern World System. 4
Vol. New York: Academic Press.

Ward-Perkins, Bryan (2006). The Fall of Rome and the End of
Civilization. New York: Oxford University Press.

Weber, Max (2002). The Protestant Ethic and the Spirit of Capitalism.
New York: Penguin.

Webster, David L. (2002). The Fall of the Ancient Maya. New York:
Thames and Hudson.

Webster, David L., Ann Corinne Freter, and Nancy Gonlin (2000).

Copan: The Rise and Fall of an Ancient Maya Kingdom. Fort Worth,
Tex.: Harcourt College Publishers.

Wheatcroft, Stephen G., and Robert W. Davies (1994a). “The
Crooked Mirror of Soviet Economic Statistics.” In Robert W. Davies,
Mark Harrison, and Stephen G. Wheatcroft, eds. The Economic
Transformation of the Soviet Union , 1913-1945. New York: Cambridge
University Press.

(1994b). “Population.” In Robert W. Davies, Mark Harrison, and

Stephen G. Wheatcroft, eds. The Economic Transformation of the Soviet
Union, 1913-1945. New York: Cambridge University Press.

Wiener, Jonathan M. (1978). Social Origins of the New South:
Alabama, 1860-1885. Baton Rouge: Louisiana State University Press.

Williamson, John (1990). Latin American Adjustment: How Much Has
Happened? Washington, D.C.: Institute of International Economics.

Wilson, Francis (1972). Labour in the South African Gold Mines,
1911-1969. New York: Cambridge University Press.

Wilson, Woodrow (1913). The New Freedom: A Call for the

Emancipation of the Generous Energies of a People. New York:
Doubleday.

Woodward, C. Vann (1955). The Strange Career of Jim Crow. New
York: Oxford University Press.

Woodward, Ralph L. (1966). Class Privilege and Economic
Development: The Consulado de Comercio of Guatemala , 1793-1871.
Chapel Hill: University of North Carolina Press.

Wright, Gavin (1978). The Political Economy of the Cotton South:
Households , Markets, and Wealth in the Nineteenth Century. New York:
Norton.

(1986). Old South, New South: Revolutions in the Southern Economy

Since the Civil War. New York: Basic Books.

(1999). “The Civil Rights Movement as Economic History.”

Journal of Economic History 59: 267-89.

Zahedieh, Nuala (2010). The Capital and the Colonies: London and the
Atlantic Economy, 1660-1700. New York: Cambridge University Press.

Zewde, Bahru (2002). History of Modem Ethiopia, 1855-1991.
Athens: Ohio University Press.

Zohary, Daniel, and Maria Hopf (2001). Domestication of Plants in
the Old World: The Origin and Spread of Cultivated Plants in West Asia,
Europe, and the Nile Valley Third Edition, New York: Oxford University
Press.

“Truly awesome . . . brilliant in its simplicity and power." — 810x0 Levitt, coauthor of Frtiiltonomics

THE ORIGINS OF

POWER, PROSPERITY, AND POVERTY

WHY

NATIONS

FAIL

DARON ACEMOGLU JAMES A. ROBINSON